Insurance Replacement Valuation for a Special Purpose Property

Once in a blue moon, it will happen to all of us appraisers: Appraising a special purpose property, or let’s call it an “oddball”. For market value appraisals there are techniques in place which can be used, but what about Insurance Replacement Valuation?

Citizens and most other insurance carriers (if they are smart and follow Citizens standards) require properties to be appraised with the valuation software Marshall & Swift/Boeckh. This software has a variety of different property groups to choose from, which can be tailored to the subject property up to a certain point.

But what happens, if you have to appraise properties like the one shown in the photo below?

And this is where the rubber hits the road and solid construction knowledge comes into the game. In cases like this, we appraisers need to be able to calculate the building value with the cost segregated method, which means we have to calculate every building item separately:

Foundation, walls, wall openings like windows and doors, roof, balconies, porches, open areas under main roof, stairs, railings, all utilities, and the complete interior build-out, etc. The cost segregated method can only be done with blue prints, which means that without the ability to read blueprints a project like this should not be accepted by an appraiser.

An assignment of this kind should be calculated with a “Division Estimate”, which segregates the building into the different construction trades:

Division 1            General Requirements (Soft costs)
Division 2            Site Construction
Division 3            Concrete
Division 4            Masonry
Division 5            Metals
Division 6            Wood and Plastics
Division 7            Thermal and Moisture
Division 8            Doors and Windows
Division 9            Finishes
Division 10          Specialties
Division 11          Equipment
Division 12          Furnishings
Division 13          Special
Division 14          Conveying
Division 15          Mechanical
Division 16          Electrical

Depending on the location of the project, variables like labor cost and Overhead & Profit, need to be adjusted.

For appraisers with little construction or cost estimation background, I highly recommend teaming up with an engineer or experienced general contractor. This can be fun work with a steep learning curve for both the appraiser and the contractor.

And remember: when this valuation is prepared for an insurance replacement valuation, add between 10% and 12% for reconstruction vs. new construction.

As always, thanks for reading my blog, please share with others and feel free to call or email me with questions and comments.