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    COST APPROACH

 
 

Reprinted below is an article from Working RE that talks how the cost approach for appraisal purposes is not the same as a cost approach done for insurance purposes.

What does this mean to you?
Simple- if you are getting a new mortgage then your lender most likely will require that you have homeowner's insurance. Many lenders determine how much insurance you need by deconstructing the cost approach done by the appraiser. The problem is that the appraiser completes the cost approach specifically for the purposes of value- NOT for insurance purposes. The cost approach figures in the appraisal are more than likely not the same figures that your insurance company would use. This means that you could be required by your lender to purchase too much or too little insurance for your property.

Why do they do this?
They are trying to save money. The lending business is extremely competitive and the lenders with the lowest costs usually have an advantage. In this situation, lenders are trying to save money by incorrectly using the data in the appraisal for a use for which is wasn't intended.

What's the solution to this problem?
Consult with your insurance company and ask them to recommend how much insurance you need based upon their advice. Don't trust the appraiser's figures for this purpose.

 

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