Insurance Appraisal vs Bank Appraisal: What’s The Difference?

Is There A Difference Between an Insurance Appraisal and a Mortgage Appraisal?

A question I’ve been asked in the past has to do with the difference between an insurance appraisal and a bank appraisal. While both are appraisals there are big differences between the two so I thought I would share with you what they are.

Is There A Difference Between an Insurance Appraisal and a Mortgage Appraisal

What Is An Insurance Appraisal?

First off let’s talk about what an insurance appraisal is. An insurance appraisal is performed to determine what it would cost to rebuild a structure after it has been destroyed.

This type of appraisal typically includes the cost of personal property as well, however, for this discussion we will only be talking about real property, namely the house itself.

With an insurance appraisal, the goal is to determine what it would cost to replace or rebuild the structure in question in its current form. This is done to help develop an insurance policy to cover the property and to help estimate what the premiums would be.

The insurance appraiser will examine the property to determine the square footage of the home, materials of construction, and features in order to calculate a replacement cost. The estimate does not include the value of the land the property is located on.

In addition to the replacement cost, the cost of demolition and debris removal are also included. It should be noted that depreciation is not a part of the calculation because the home would be rebuilt using new materials.

While I am not an insurance appraiser it makes sense that as construction costs soar like they are doing now, insurance coverage should be adjusted to account for the increased cost of the material. Lumber costs have skyrocketed so much that you should check with your insurance company to make sure that if you had a loss you could still rebuild like you planned when the original policy was written.

What Is A Mortgage Appraisal?

A bank or mortgage appraisal is different in many respects from an insurance appraisal. A bank appraisal is used to estimate the market value of a property for the bank for collateralization purposes.

Similar to the insurance appraiser, the mortgage appraiser collects information about the house related to its physical characteristics. This is then used to develop an appraisal using the three approaches to value which are the cost, income, and sales comparison approach.

During the development of the cost approach the appraiser factors in depreciation, which the insurance appraisal does not. The idea is to calculate a property value estimate by adding the current replacement costs to the land value less depreciation.

With a bank appraisal, the various approaches to value are somewhat interdependent of one another. Depreciation estimates derived from the sales comparison approach are used in the cost approach and the value from the cost approach is used to help bracket recent sales to use in the sales comparison approach.

The sales comparison approach compares recently sold homes to the subject. The bracketing mentioned above is used to determine the best comps which should be similar in age, style, appeal, quality, square footage, condition, and location.

Unlike the insurance appraisal, the cost approach developed for the mortgage appraisal includes land value. This is because the comps used in the sales comparison approach include both house and land.

Recap

Top Differences Between an Insurance Appraisal and Bank Appraisal:

  • The insurance appraisal does not take into consideration depreciation.
  • The insurance appraisal does not include land value.
  • The insurance appraisal includes demolition cost and debris removal cost.
  • A bank appraisal determines the market value of the home.
  • A bank appraisal compares the property to homes of similar age.
  • An insurance appraisal determines the replacement cost and considers what other similar new homes have sold for.
  • A bank appraisal factors in depreciation.
  • A bank appraisal includes the land the home is built on.

As you can see there are big differences between these two types of appraisals. It would not be wise to use a market value appraisal for insurance purposes because the values arrived at are different for each type of appraisal.

Question

Do you have any other questions about insurance appraisals vs bank appraisals? If so, leave a comment below and as always thanks for reading.

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Comments

  1. Todd Crawford says

    Hi, Tom,

    I appreciate the info you bring to us in these blog posts. I think they provide insight to realtors, appraisers and to the general public. One question concerning insurable value is if underground pipes, electrical, slab or foundation components should be included. Thank you!

    • I am not an expert in insurance appraisals so I would recommend that you speak with someone that is and knows more than I do, however it would seem reasonable to me that anything that could be damaged would be included such as the items you mentioned.

  2. I’ve never actually had an insurance company perform an appraisal. I think in the past they just wanted to know the value and left it at that. Maybe the numbers simply worked. Whatever the case, it’s so important to understand how a different purpose for a valuation can yield different results and/or require a different scope of work. It’s not all the same.

    • I have been asked in the past to provide a cost approach for insurance purposes, which would not be accurate for the reasons I mentioned. You are right though in that it is a different scope of work and is more concerned with replacement cost rather than any depreciation that it may have had.

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