What Every Homebuyer Should Know About Replacement Costs

When buying a home, most buyers focus on the purchase price, mortgage rates, and market value. 

But there’s another critical number that deserves equal attention. Replacement cost: the amount it would take to rebuild your home from the ground up in case of destruction. 

And according to insurance expert Todd Rissell, that number has surged dramatically in recent years. "If your policy was $250,000 of coverage in 2020, am I telling you it should be $500,000 now? Yes."

Replacement Costs Have Nearly Doubled Since 2020

In a recent PropertyLens podcast episode, Todd Rissell of E2Value shared a startling insight: replacement costs have almost doubled since 2020. This surge is driven by rising material costs, labor shortages, and increased demand for skilled workers. "There are only so many electricians, only so many plumbers."

For homebuyers, this means that insurance coverage levels that seemed adequate a few years ago may now leave them underinsured.

Market Value ≠ Replacement Cost

One of the most common mistakes homebuyers make is assuming that market value and replacement cost are the same. They’re not.

"The market value has very little to do with replacement costs, but the financial impact of a loss has everything to do with replacement costs."

For instance, in coastal areas like Rye, New Hampshire, market values may be higher than replacement costs due to land value. But in most of the country, replacement costs exceed market values, meaning homeowners who insure based on their purchase price could be left with a major coverage gap.

"When buyers insure their home for what they paid - say $250,000 - they think they’re covered. In reality, they may be drastically underinsured from day one."

How to Make an Informed Decision

Understanding replacement costs isn’t just about getting the right insurance. It’s about making a fully informed homebuying decision.

Rissell recommends looking for policies that offer 125% to 150% replacement cost coverage, ensuring homeowners have a buffer against rising construction costs.

"As long as the parameters are explained to the buyer properly - this is what's at stake, this is what impacts your finances - they can make the right decision about their coverage level."

And with replacement costs projected to increase another 6-8% this year, ensuring your home is properly insured from day one has never been more important.

By factoring in replacement cost early in the homebuying process, you can protect your investment, avoid financial surprises, and move forward with confidence.