How Much Dwelling Coverage Do I Need on My Home?


Market Value


The first home value that everyone thinks about is market value. This is a ballpark estimate of how much your house is worth on the real estate market.

Everyone wants this value to be as high as possible. Am I right?

Even if you’re not going to sell to see your home market value increase makes you feel better.

Tax Appraisal Value

The second value we deal with every year in Texas is the tax appraisal value.

This is the value the county places on your home and the government charges you property taxes based on this value—the value we want as low as possible.

People will go to great lengths to prove how over-valued their home is by the county.

It’s funny, the other day as I was explaining these different values to one of my clients to prove my point, I pulled up his home on Zillow and asked him if the estimate on the website was accurate.

He said, “No way! I just talked to my neighbor, a real-estate agent, the other day, and she told me our entire neighborhood was undervalued on that site by at least $30,000.”

Next, I asked him how much his tax-appraised value was, and he said the county had it overvalued by at least $50,000 based on comps.

He then went on and on about how his house wasn’t really worth that much.

The funny thing about it was when I pulled up his house on the Texas Association of Appraisal Districts (TAAD) website, the tax value was already $50,000 less than the estimate on Zillow!

I’m not making judgements on him; in fact, I do the exact same thing.

I want my real estate value to be as high as possible, and I want my tax value as low as possible.

I don’t care if I sound schizophrenic.

But which of the values do we use in the insurance world to value your home?

The answer to that question is neither.

Replacement Value

A third value called replacement value is used in insurance.

If you want your real estate value high and your tax value low, you want your replacement value to be correct.

This number is what the insurance company will pay if your house is a total loss, and if it’s not correct, you’ll be the one paying to make up the difference.

When I sit down with most people, they see the replacement value of their home. They’re first response is usually, “If you want to buy my house for that, I’ll sell it to you right now.”

I totally get what they’re saying.

However, they are also taking some things for granted that they don’t realize could cost them thousands of dollars down the road if they aren’t accounted for in the replacement value—things like increases in the cost of labor and materials.

First, if you’re like most people, you bought your house from a homebuilder who built three, ten or even twenty houses at a time.

Because of this volume building strategy, they received huge discounts on the labor and materials, which were directly passed on to you in the selling price.

In essence whether you realize it or not, you bought your home at a discount.

There’s no way you could hire an independent builder today to rebuild or fix your house for the same dollar per-square-foot cost.

Second, people don’t realize that home values are always moving and usually up throughout Texas.

Here in North Texas, we have one of these fastest growing populations in the United States.

Right now, we are averaging about five percent a year, and it’s projected to continue for at least the next five years.

So you can imagine what it’s going to do to home values!

Insurance companies have a fiduciary responsibility to make sure they keep up with this increase.

They’re not trying to be underhanded by increasing your dwelling amount a few thousand dollars every year; they are trying to make sure they’re meeting this fiduciary responsibility and avoid lawsuits.

Third, most people do not realize how much cleanup costs can be involved in a total loss.

This is a common expense most people do not think about, but it needs to be considered in your dwelling amount.

Fires and tornadoes, the two most common total-loss causes in Texas, leave a lot of debris, and it will be up to you to get it all removed before you can start building.

Clean-up can run in the tens of thousands of dollars before new construction can even begin, so it makes sense to add a little extra to your dwelling amount to make sure these expenses are covered.

Also, ask your insurance company if they offer an extended replacement cost endorsement to their homeowners’ policies.

These can add 10-25% or more to your dwelling amount if your total loss meets certain criteria.

A lot of insurance companies offer the extended replacement cost, but make sure you ask what circumstances must be involved for the endorsement to kick in.