Replacement Cost Appraisal

1
REPLACEMENT COST APPRAISAL
2
Real estate investors typically procure a
replacement cost appraisal, or reproduction cost
appraisal, and evaluate a propertys location,
and market value before investing in a particular
property. In a steady up-and-coming location, new
businesses are opening and new buildings are
being made to meet the demands of the
marketplace. Replacement cost appraisal and
reproduction cost appraisal can offer drastically
different results and owners, investors and
insurers should know the difference and what
appraisal approach to take. What is Replacement
Cost Appraisal and How its Done? Suppose you have
a low-rise apartment building in Toronto and a
severe storm causes extensive damage to the roof
and walls which cause further damage to the
interior of the building. The replacement cost
would be to replace the components with similar
materials, using current construction practices
with similar functions at the current market
price. So, the repaired components would be
replaced with masonry, glass and other readily
available materials. The Replacement cost is
typically measured in dollars.
3
Replacement cost appraisals are common in the
insurance policy of homeowners in case of floods,
earthquakes, storms, fires and other natural
disasters. Why Does it Matter? Replacement cost
matters most in commercial real estate
investments because it keeps investors of old,
and sometimes historic, commercial buildings on
their toes. Investors of the old commercial
buildings would have to keep investing money in
the old building for renovation and better
functions to keep up with investors of new
buildings and the ever-changing demands of the
marketplace. As rent rates and location growth
rates are changing rapidly, it is only logical
that renters or buyers would prefer newer
buildings with innovation to match the price or
rent rates. When disaster strikes and the
building needs to be rebuilt, replacement cost is
typically the most cost-effective way to make the
property owner whole again.
4
In the case of a historical building, or property
of significant heritage value, the owner and
perhaps the City may want to preserve and restore
the historic features of the property and
therefore a reproduction cost appraisal is what
is required. How to Calculate the Replacement
Cost? To simply put it, get an estimate from a
local contractor or local insurance company to
know how much it costs to construct a building
per square foot, and then multiply that by the
square footage of the building and the answer you
get is replacement cost. Sometimes replacement
cost depends on an 80/20 rule. A single-family
residence has to be insured up to 80 of a
propertys replacement cost. If thats not the
case, they may not get the full value. Insurance
companies usually pay the replacement cost in two
installations first, they pay the depreciated
cash value of the improvements and then they pay
for the replacement materials or objects you
purchased in place of the original one.
5
Difference Between Replacement Cost and Market
Value Replacement value is the value you get in
exchange for your damaged property if peril
strikes or the cost an owner or investor would
incur to replace the property and/or its
improvements on site. Market value is the price
at which a property is expected to transact in a
fair and reasonable exchange between buyer and
seller in the open market. For example, if you
sell your home at market value for 1 Million,
the replacement cost could be only
700,000. Market value is decided upon the
square footage of the land, the building, the
area in which it is situated, and if all
essential amenities and luxury are available
nearby. Replacement cost is the estimate you
would have to spend to build a similar building
with similar materials and utility in todays
labor and material prices. It is advisable to let
your insurance company know about any renovations
you do to increase your replacement cost in order
to protect yourself in the event of a disaster.
6
Difference Between Reproduction Cost and
Replacement Cost Reproduction cost appraisal is
the estimate you would get to build a replica of
the building using exact materials, architectural
standards, quality of workmanship, and embodying
all the deficiencies or historical elements of
the building. Conversely, a replacement cost
appraisal is an estimate you get for building a
similar building with the same purposes using
modern building standards, design, labor, and
better materials to meet the craftsmanship of
modernity. For example, if the wooden flooring
gets destroyed by flood, you get the reproduction
cost to redo the wooden flooring. With
replacement cost, you can do vinyl or marble
flooring.
7
Conclusion Investors should always research the
propertys location, new developments being made,
ever-changing market prices of land, labor,
material cost, as well as replacement cost
appraisal and what risks it entails and how to
avoid it. We do the hard work for you and help
you make the right choices to get your moneys
worth. Nicro Realty Group is a leading real
estate company helping investors to build strong
economic assets and minimize risk for a better
future through our years of expertise and
knowledge of the commercial market. To get your
moneys worth and learn more about investment
opportunities, contact us today! Contact Nicro
Realty, replacement cost appraiser in Ontario.
8
1220 Burloak Drive, Burlington, ON L7L 6B3
CONTACT US
nicrorealty.com
905-518-5250
gabe_at_nicrorealty.com
9
(No Transcript)