You’ve been watching HGTV and pouring through copies of This Old House Magazine and you’ve become inspired on what you want to do with your home. Or maybe, you’ve found the perfect home to buy that matches the vision you have for it and nobody else can see past the dated kitchen, bathrooms, and flooring. Congratulations! I can’t say I have that gift and am amazed to see what friends and clients have done with a home that looked one way and made it uniquely theirs.
I have a friend and new client who just bought a home in east Dallas. The home was built in the early 1960s, has a unique style and has never been updated. David and Deb (not their real names) have a gift of seeing the potential of what can be done with a home like this; they’ve done it before and even launched a business of doing this for other people. I’ve seen before and after pictures of their two previous projects and their work is truly inspiring.
There are home insurance implications for fixing up, remodeling, or updating a home. Insurance companies make an important distinction on how they insure a home that’s being renovated. This distinction is based on whether or not the home is occupied during the project.
Unoccupied Renovation: If you’re buying a home and planning to conduct a major remodeling project before you move in, your insurance will be different:
- You will not start with a traditional home insurance policy.
- You’ll need to purchase a vacant remodel policy.
Most insurance companies will not write a home policy on a home if it will be unoccupied during the renovation. The biggest reason for this is the level of risk or exposure on the property is greater than if you’re living in it. History shows vacant homes are more susceptible to being broken into, theft (usually tools and building materials), as well as vandalism.
Vacant remodel policies are very different from home policies in how the amount of coverage or insurance is determined. The information you’ll need to provide to your agent for underwriting approval includes:
- Purchase price of the home
- Value of the lot on which the home resides
- The amount that will be spent on the remodeling project
The underwriter will insure your home for its purchase price less the lot value plus the amount budgeted for the remodel. For example:
- The home’s purchase price is $200,000
- The lot value of $30,000 is subtracted
- The amount of the remodel is $35,000
- The home will then be insured for $205,000
In addition to the financial information, the underwriter will need information on the scope of the project including:
- Length of time the project will take
- A list of the improvements that will be done
- Square footage if added to the home
- If the home will be structurally altered
- Whoever is hired to perform the work (licensed contractor, plumber, etc.)
There are also three major differences between a vacant remodel policy and a home policy:
- Vacant remodel policies are usually insured on an actual cash value basis instead of a replacement cost basis
- Vacant remodel policies usually do not insure your contents (furniture, clothing, electronics, etc.)
- Vacant remodel policies typically run for a shorter period of time such as 90 days, 6 months, 9 months, etc. while a home policy runs for a year
The cost of a vacant remodel policy can run a little less than a home policy but in most of the ones I’ve written, they tend to be the same or more than a standard home policy.
Once the project is complete and you’re ready to move into your home, it’s time to start your home policy.
Occupied Renovation: If you’re going to live in the home while the project is underway, you can start with a standard home policy. There’s no need for a vacant remodel policy.
There are several things you should discuss with your insurance agent before the project starts; whether this is a new purchase or a project on your existing home, including:
- What your home is insured for before the project begins
- The scope of the project and cost of improvements when completed
Certain remodeling projects add value to your home: a new kitchen, an updated master suite and master bath, adding a second story or expanding the square footage by adding to the home. In these cases it’s important to:
- Review the home’s replacement cost before the project begins
- Review the home’s replacement cost once the project is completed
The key is to cover the home for the upgraded value so you’re fully protected should something happen to the home after the project’s completed. I usually recommend my clients make policy changes prior to the work beginning so we don’t have to worry about valuation changes mid-project.
There are two more key insurance issues all homeowners need to address prior to selecting the contractor or workers, but we’ll save that for next week’s blog. Do you have a comment, suggestion or question? If you do, share them with me in the comments section of our blog or on our Facebook page. I’d love to hear from you.
