What are reinstatement costs?
Before buying a property, you have several key pieces of information to work with. Two of these are the market value and reinstatement costs. Reinstatement costs are an essential part of homebuying. They usually play their most significant aspect in home insurance policies, something you’ll need to get a mortgage. In this article, we’ll be explaining what reinstatement costs are and why they’re so crucial to consider.
What does reinstatement costs mean?
Reinstatement costs are how much money it would take to rebuild your property from scratch to its initial condition. For example, if your property was destroyed entirely – through something such as a fire or gas explosion – the whole house would need to be rebuilt. As part of the policy, the insurance company needs to know how much this will cost them, as they’ll be the one paying. The reinstatement costs make up the total value of the entire rebuilding process. ‘Reinstatement value’ and ‘rebuild cost/value’ also mean the same thing – they’re simply other terms for reinstatement costs.
How do I find out a home’s reinstatement costs?
To find out the reinstatement costs of a property, you’ll need a reinstatement cost assessment (RCA). After the RCA, you’ll get an official document with the reinstatement costs explained to you. Reinstatement cost assessments aren’t just for the homebuyer. RICS recommends an annual adjustment to account for inflation and a new survey every three years to ensure both you and the insurance company are kept up to date. See Section 3 (page 4) of this document.
Are reinstatement costs the same as the home’s value?
Reinstatement costs are different from a home’s value. The market value of a property is made up of several factors, including:
- Its condition
- How old it is
- The local area’s desirability
- Other market factors
Reinstatement costs, however, are comprised purely of construction costs. These might include:
- Cost of original materials
- Agents for sourcing materials
- Professional fees
- Original construction methods
- Clearing the land
- Reinstalling facilities and services
Why are my reinstatement costs higher than the home’s value?
On many occasions, you’ll find that reinstatement costs are actually higher than the home’s market value. How does this make sense? How could the original home builder have made any money? While it seems a bit strange at first, there are a few possible simple answers. Homes – today, especially – tend to be built in large groups or estates. The construction company can more easily spread the costs across these properties during this process. However, when it comes to just building one, the costs are more focused. As a result, the reinstatement costs are higher than the original construction costs and, potentially, the market value.
Most people know about inflation and how it affects the property markets. According to the Office of National Statistics, English house prices rose by 10.2% over the last year to March 2021 – a staggering amount and perhaps a slight anomaly brought on by the COVID-19 pandemic. Alongside house inflation, material and labour costs also experience rises. Over the past 18 months, we’ve seen huge increases in timber prices (see this data from the Government) and the worldwide builder shortage, driving labour costs up. If construction costs rise quicker than the market value, they could soon overtake it, meaning reinstatement costs would be higher than the home’s value. Some old properties might use materials that are hard to find these days. This could mean reinstatement costs are higher than the market value. Materials such as stone also significantly increase costs. With older properties there is no direct correlation between market value and construction costs which may have been incurred 100 years ago or more.
Why are reinstatement costs important?
The complete destruction of your home is the worst-case scenario for anyone. Home insurance policies cover this situation and can be an absolute lifesaver should it ever happen to you. When you get a home insurance policy, the company will need to know the reinstatement costs to know how much they’ll be paying to rebuild your property. As a result, any home insurance policies are insured against the reinstatement costs, not the market value.
For example, let’s assume you were looking at a property with a market value of £175,000. A reinstatement cost assessment might conclude that this property has reinstatement costs of £200,000. Theoretically, if you were to insure this house for £175,000 and it then sadly burned down, the insurance company would pay you that amount. You’d suddenly find yourself short £25,000, a cost that most people don’t have lying around in their back pockets. Of course, that’s just an example. In theory, some people would get lucky, but many would find themselves in serious debt. Even if not completely destroyed, the insurance company may pay only a proportion of the costs, based on the amount by which they consider the property is under-insured.
It’s virtually impossible to get home insurance policies without a reinstatement cost assessment. This protects you against underpayments and the insurance company against overpayments, so it’s a win-win situation.
Are reinstatement cost assessments covered by home surveys?
During a home survey with a valuation, the surveyor will estimate individual repair costs for different aspects of the property and include them in the report. Home surveys can be a valuable way to get a rough estimate of reinstatement and repair costs. At GB Home Surveys, we can offer this service. For more information or to ask us any questions, please get in touch. For full estimates of reinstatement costs for a building, look for nearby RICS-regulated companies that offer reinstatement cost assessments (RCAs). Listed buildings require a different approach to reinstatement costs because of the specific features they usually have which require skilled craftsmen. We are, therefore unable to provide accurate reinstatement costs for these types of properties.