By Keri Herlong
Last year, my husband and I sold our home and moved to a new home. The “new” home is approximately the same age as our old home but needs extensive renovation. All the way from the driveway to the roof.
When we moved nine months ago, I knew renovation would be a slow process. I knew that increasing material costs and labor shortages would affect what we could do, when we could do it, and how much it would cost.
It’s been nearly a year and the progress is moving even slower than expected. Between my husband and I, we have contacted no fewer than 50 different contractors for everything from landscaping to fencing to drywall to tile to countertop installation. Our guest room is storage for 2500 pounds of flooring that can’t be installed yet because we have other projects that need to be done first. Not that I would have guests in this mess, anyway!
So, am I typing this simply to wax dramatic about my renovation misfortune? No, the point is to discuss how the current economic environment affects building values, availability of labor and materials, and what you can do if you are planning your own renovations.
Replacement cost value, loan appraisal value, and market value are not all the same numbers.
Replacement cost value is the amount of money needed to replace something – in other words – to rebuild your building as it is, where it stands. This limit takes into consideration the cost of materials and labor, as well as soft costs, at the time the replacement cost estimator is completed.
Loan appraisal value is a professional judgment of the property’s worth, which a bank uses to decide how much to loan you. At a very basic level, it is the amount the bank thinks they could sell the building for if you default on the loan. This is tied to market value but is not the same – the number is determined, of course, at the time the loan is funded.
Market value is the amount of money a willing seller will pay a willing buyer to purchase a property. Market value when you took out your loan is probably much different than your loan value today (depending on when you took out the loan, of course).
These values are important to keep in mind because insurance companies use replacement cost value when setting limits, but if you apply for a HELOC or mortgage, they consider the appraisal value. A conscientious insurance provider will explain that while your bank wants to see an insurance policy with a limit the same as their original loan value, the policy language is based on what it will cost to rebuild, not what it will cost to pay off the loan. Which brings us to the next topic.
Labor & Materials
Consider this: if your property were to be involved in a single claim, a contractor who could fix or rebuild it should be relatively easy to find. They would also have more immediate access to building materials. However, if you live in an area where there are multiple buildings damaged at a time (an area where there is a high incidence of windstorms, or wildfire, for example), finding a contractor and the necessary materials becomes more of an effort. You may find a contractor, but it is possible they would not be able to work on your project for three months or perhaps longer.
The labor and material challenges are exacerbated by the current economic and political environment. Even in the absence of many claims at the same time, there are fewer employees willing to work for a construction company, which means that the contractors can increase their prices due to increased demand. Combining that with difficulties or delays in obtaining materials needed for a job makes a perfect storm of frustration for the consumer.
With delays in getting a project started and increased costs of materials and labor, at the time a loss occurs, the limit you originally decided on at the beginning of the policy period may no longer be enough. Because of this, it is important to assess your limits on a more frequent basis than annual, and check with your insurance provider for endorsements that might provide you extra coverage.
For example, for commercial buildings, inflation guard is usually readily available and often is automatically included, but is it enough? If the US inflation rate is sitting at 10 percent, and your inflation guard is 6 percent, you may find yourself with lower limits than you need. Ask your insurance provider if they have a full replacement cost option. When this is on a policy, there is no limit on the declarations page – whatever it costs to replace the building is what the carrier will pay. Some carriers offer a full replacement cost option for homeowner’s policies, as well.
Planning for your own renovations
Considering what it may cost to rebuild your home or business where it stands is consistent with what it will cost when hiring a contractor to renovate. Or, if you are a DIY-er, you can save money on labor, but a four-foot by eight-foot sheet of plywood is still going to cost $30 to $80 depending on where you live and what grade you need. In addition, it may take longer to get the materials you want. That could work for you or against you. If you don’t have room to store new appliances today, then a three-month delay is not a big deal.
Keeping these things in mind lets you make informed decisions about when you want to buy wood, steel, copper, appliances, cabinets, fixtures, etc. Prices might go down from where they are now (we can hope), but they could also continue to climb for years.
Realize that you are going to pay more today than you would have three years ago and decide for yourself if it is worth it. I estimate my renovation will probably cost 25 percent more than I thought when we bought the house, and I’m probably being conservative. When we were researching a new HVAC system at this time last year, the estimate was $8,000 installed. By the time we found a contractor who could do it, the price had doubled. Ouch!
Cycles are no longer predictable like they were in the past, so when you find a good deal and can afford it, grab it, because there’s no telling if it will get that good again. But if having new kitchen cabinets and countertops within the next six months is worth the extra cost, then go for it! If you can live with your kitchen another three years, it could be worth it to wait and take your time looking at other options. For example, my drywall and paint contractor told me about another job he is working on where the homeowners are taking out nearly new cabinets and plan to just take them to the dump unless someone wants to come get them.
We have so many options available to us now – Facebook Marketplace, Craigslist, Habitat for Humanity ReStore, estate sales, local community newspapers, and hardware store bulletin boards to name a few. If it is important to save more than you spend, you have options for doing renovations on a budget. If you want it done now, just be prepared to be patient while you wait for your materials to arrive, and to set a realistic budget.
So, is there relief in sight?
Not to be the doomsayer, but probably not much. The normal economic cycle sees prices ebb and flow based on supply and demand, geography, weather, and yes, politics. Anyone who lived through the late 70’s and early 80’s will remember the last time we saw a similar economic environment. They will also remember that it did get better, but it did not “go back”. The economic wheel will keep on rolling, but it is rolling uphill. Right now, our hill looks like the Rockies. But like every economic cycle, we can expect the grade to flatten into foothills at least a little in the coming years.
Keri Herlong is a Commercial Underwriting Consultant for Acuity. She has been a member of IAIP since 2011. Since joining the association, she has served at the local level as Secretary, President-Elect, and President. She is currently Education Director for Region VII and serves on the International Education Task Force. Keri has earned several awards from IAIP, including International Risk Manager of the Year 2021 and International Confidence While Communicating Speak-Off Winner 2020. She also chairs or serves on numerous committees within IAIP at the regional and international levels. Keri earned an AS in Psychology (Summa Cum Laude) from California Coast University. In 2021, she published her first book, Hindsight 2020, under the pen name Jessie Jericho.