[StBernard] Flood Insurance Questions

[Westley Annis]

Dean,

As an appraiser, perhaps I can give you a little insight but it might not
give you the entire answer you're looking for.  When I appraise a typical
single family residence, the lender wants to know two different types of
value the property has.  Naturally, one is by comparing similar properties
with recent market sales and making dollar figure adjustments to the
differnces between subject and comparbles.

The other type of value they want to know is the "cost approach."  In short,
this is where the appraiser tries to breakdown the various components that
comprise real property and basically tries to put a dollar figure on what it
would cost to build the subject property all over again at today's costs.
With rare exception, the "cost" approach to value always comes out higher in
value than the market comparison approach.  Thus concluding that it is
always less expensive to purchase an existing home than to build one
yourself.

Anyway, when performing the "cost" approach the appraiser determines what
the land (or lot) would be worth if were being sold as an empty lot ready to
build on.  Then the appraiser takes the total square feet of living area and
multiplies it times would he determines to be the current market cost to
rebuild the house (improvements) or "replacement" cost.  He then adds the
cost of other items and amenities such as the current cost to build a
garage/carport, sheds, alarm systems, fences, patios, porches, pools, decks,
hot tubs, etc. - you get the idea.

Now, here comes the "depreciation" part you spoke of.  After the appraiser
arrives at a dollar figure to rebuild the home at current market costs, he
subtracts from that figure how much he thinks the improvements have
depreciated.  Now, notice what I just said - what "he" thinks.  You see,
there's no science here - it's purely an opinion based on what the appraiser
feels is the current "condition" of the improvements (the home).  One
appraiser or "insurance adjuster" might look at a home and say "this house
is 20 years old but I think it looks like a house typically in the condition
of a 5 year old house."  So, at this point, by the cost approach formula a
home is given an economic life of 50 years.  In the example I gave, the
appraiser or adjuster would divide 5 years by 50 years and arrive at a
depreciation rate of ten percent (10%) and subtract that percentage from his
figure to rebuild the house at today's construction prices.  And then, adds
to that figure the current market value of "lot improvements" such as
landscaping, trees, birdbaths, anything that would give value to your yard
basically - and that figure is not depreciated but completely tacked on to
the total replacement cost minus the depreciation percentage.  Then you have
your value by the "cost approach".

The obvious problem here, as beauty is in the eye of the beholder, so is the
adjuster's opinion as to what was the condition of your home was prior to
the storm to determine what percentage of depreciation he will apply.  And,
I can tell with certainty, adjusters (unlike appraisers) are always slanted
in their opinion to the worse case scenario - or they always assume your
home might not have looked as well maintained as it could have been.  In
other words, they NEVER give the homeowner the benefit of the doubt their
home was in excellent condition.  But it all comes down to only an opinion.
That's why in an earlier post I mentioned how adjusters rarely are up to
date on current market rebuilding costs - particularly after a storm like
Katrina that could easily drive up the cost of building materials by as much
as 30% or higher.

We haven't even started to feel the impact Katrina will have on building
materials.  There has never been a situation where a natural disaster has
resulted in needing over 200,000 homes to be rebuilt - as we are facing now.
Remember just few years ago the hurricane that hit Honduras causing building
materials here in the U.S. to increase over 12% - and that was destruction
on a relatively small scale compared to what Katrina has done.  I know for a
fact insurance adjusters are using pre-storm building costs and not taking
into consideration what will be dramatic price increases in the upcoming
months - by the time you are likely to get a contractor to give you a quote.
That's why I suggest NOT to agree to a quick check from your insurance
adjusters until you have been able to obtain some quotes from contractors
(if you can).  I know for a fact the check offered to me by my adjuster for
damage to property I have on the Northshore won't even cover the cost of the
building materials, let alone the labor cost.

I know it's difficult to be patient at a time like this, but I would wait as
long as you could before even getting quotes to see what happens to
construction costs over the next couple of months.

My apologies on being so long, but this is not a quick subject to learn or
talk about.  Just remember, the adjuster's final figures (from replacement
cost to depreciation) are only "his" opinion and you can tell him you reject
his findings and you will get your own quotes.  I hope this helped - some!

God bless and best of luck,

John Scurich