The Importance of Accurate Property Valuation for Insurance

For property managers, risk management is often a top concern, as potential threats to properly maintaining short-term rental properties seem to lurk everywhere. Chief among the threats is damage to or the loss of the property.

You have insurance. But do you know if the policy is properly valued? When was it written? When was it last updated? Accurate property valuation for insurance is critically important to ensure that your properties have the right coverage at the right premiums. 

Large numbers of properties are currently underinsured. This is because real estate values shot up after the COVID-19 pandemic, natural disasters have increased in frequency and destructiveness, and replacement costs driven by inflation, supply chain issues, and rising labor costs have outdistanced previous valuations.

Having an accurate property valuation for insurance can help you and your property owner clients avoid shortfalls in coverage and potential financial problems if your properties are damaged.

Why Property Valuation for Insurance Matters

While the value of your short-term rental portfolio grows as property values rise, you could face a rude awakening if your insurance coverage hasn’t kept pace.

Insurance companies use accurate property valuations to properly assess risks and set the right coverage and premium for properties. Accurate valuation can go a long way to prevent you from being underinsured or overinsured.

Insurers rely on accurate valuations from risk managers to set the right value for the property. Obtaining the right amount of insurance for the estimated value of the property can adequately safeguard your property when you file a claim for a loss.

Your properties should be assessed for these values:

Market Value

This is an estimate of how much you could get selling the property in the current real estate market. It takes into consideration the size of the property, the condition of the building, and the location of the property.

Actual Cash Value

This is an estimate of the amount of money needed to replace your property, minus the depreciation at the time of the loss.

Assessed Value

This estimated value typically comes from your local government to determine property taxes.

Replacement Value

This valuation takes a stab at the current estimated cost to replace or rebuild a property. The replacement value depends on materials expenses, labor costs, building permits, architectural services, debris removal, and more.

Insurers recommend using replacement value to accurately assess insurance valuation, known as replacement cost valuation.

Factors That Influence Property Valuation

In good and bad economic times, keeping your property valuation in line with your insurance valuation is good risk management. However, it is especially necessary in the current real estate market.

The properties in your portfolio are being impacted in many ways, putting upward pressure on your property valuations and outpacing your insurance coverage. Consider the influence these factors have on your properties:

• Construction costs
• Weather events
• Supply chain disruptions
• Labor expenses
• Business interruption

If your property suffers a loss and these factors haven’t been captured in your property valuation for insurance, your insurance may be insufficient to cover the loss to your business. You could struggle to recover, face delays in reopening your property, or meet an even worse fate — be forced to shut down.

Using Replacement Cost Valuation

When calculating property value, using replacement cost valuation can keep you from being underinsured.

Insurers base the value of your property on how much it would cost to replace or rebuild it. They’re not using market value or even actual cash value. An insurer is looking at what it would cost to replace or rebuild your property with new materials at the current cost without any depreciation deduction.

Replacement cost valuation gives you the most accurate result with the least risk. By capturing the factors putting upward pressure on valuations, you can feel comfortable knowing you have sufficient insurance coverage to recover from a loss.

How to Assess Property Value

As a property manager wearing your risk manager hat, you can use several common approaches to accurately estimate a property value. Here’s how to get accurate property value:

• Professional Appraisal: Hire a third party to inspect the property
• Validated Tools and Guides: Use the Marshall & Swift Valuation Service cost manual
• Fixed Asset Records: Leverage records adjusted for inflation
• Team Reporting: Build a team to centralize and standardize compiling your statements of value

A professional appraisal can help an insurance company provide the most accurate insurance rating, and you can know that you have sufficient insurance coverage.

Your appraisal firm should adhere to the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute.

Whichever approach you choose, consider completing a property valuation for insurance every three to five years or more often to capture depreciation, inflation, and other factors that might change the value of your property.

Property Valuation Is Central to Successful Risk Management

Managing risks plays a key role in any successful investing, and it is front and center for you and your clients who own short-term rental properties. Accurate property valuation is necessary to keep the proper insurance coverage in line with the value of your properties.

The risks are clear for your portfolio and your clients. Lacking sufficient insurance coverage after a loss could force you to pay out-of-pocket for repairs or rebuilding, which could lead to a financial strain on your business.

You also could be hit with coinsurance penalties if your property is undervalued. Insurance often has a clause that encourages policyholders to carry reasonable and accurate amounts of insurance coverage. If you fail to do so and suffer a loss, you could receive a reduced payout.

Partner With Safely to Help Safeguard Your Investment

The tools, knowledge, and experience of the Safely team can help you build trust with your homeowner clients and increase the value of your portfolio. At Safely, we’re here to support you and make your multifaceted job look and seem easy. Get in touch with us today to discover all the ways we can help you.