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How do reinstatement costs work?

by | Dec 1, 2022

Introduction

Building reinstatement costs are one of the many things that a surveyor takes into consideration when they inspect a home in order to provide a valuation so they can provide the landlord with an insurance claim. This is because if anything bad happens to the property like if the building burned down, you would want to be insured from the costs of repair as a landlord.

This not only gives you better peace of mind but also allows you to gain approval for a mortgage so you can buy the property you are thinking about. This means it becomes an essential part of buying a property as a landlord so should be treated seriously.

A landlord looking at their wallet after having to pay reinstatement fees

What does a reinstatement cost mean?

A reinstatement cost is the cost that it would take for a landlord to completely rebuild the property so it’s not the value of the property if you were to sell it. The reconstruction of a property is significantly cheaper than the price you would pay to a developer if the building was recently constructed like in a new build property.

This is because the developer would likely take a proportion of the sale in between to make up for their labour costs and produce some profit. However, reinstatement costs don’t focus on profit and are valued at the cost to simply reconstruct the property and that’s it.

To put it simply, the value of a property is based on the following factors:

  • Market factors such as the economy and the Bank of England base rate
  • How desirable the local area is based on demographic factors
  • The age of the property
  • The condition of the property

And the reinstatement costs of a property are based on these different factors:

  • The costs of materials to find and source
  • The labour and fees involved with construction
  • The price of the construction methods
  • The cost of clearing the land involved with the property’s construction
  • The cost of installing services and facilities back to the property

It is not always the case that the reinstatement costs have to be less than the value of the home if it was sold in the conventional marketplace. Reasons for this could be cheaper construction methods in the past as opposed to the present day due to homes being built in large developments. Also, the cost of labour has also increased in the UK alongside the cost of the materials used to build the houses.

Whether reinstatement costs will surpass the value of the house sold at market value depends on the factors involved in the property like its age and the construction methods. This is why it is important to get the property valued by a surveyor instead of solely relying on the value of the home in a conventional market place.

Why is the reinstatement cost important?

Reinstatement costs are vital for the insurance of a property because an insurance company will base the value of the property they will cover in the case of severe damage based on reinstatement costs.

If the unthinkable were to happen and the property burnt to the ground and it was unfixable unlike if the house was just in disrepair, the landlord can be confident they can gain the value of the property back by asking the insurance to cover the reconstruction costs.

For example, if a landlord didn’t insure the property using the reinstatement costs and the costs were more than the value of the house which you used to insure the property, the landlord could fall into debt.

If this was demonstrated in a practical example, imagine there is a house that is built that is valued at £100,000 and the landlord takes out insurance for the value of the home.

A landlord working out reinstatement costs

However, the house burns down and the reinstatement cost is valued at £125,000, this would leave the landlord in £25,000 of debt in order to bring their home back to the same standard.

What impacts the rebuild value of a property?

Aside from the cost of raw materials in the property that are to do with the direct construction of the building. There are also secondary factors that mean a property could be more or less expensive to be built again. Here are some of the things you should look out for that could change your reinstatement costs.

The location of the property

The location can impact how easy it is to completely demolish a property and start building it again from scratch if the structure of the property is entirely damaged. As an example, the region around the home that is being evaluated could have public spaces nearby that must be treated with caution.

It could be that in order to rebuild the property you have to gain further planning permission or a wayleave in order to encroach on someone else’s land temporarily. This means the landlord could have to pay more for reinstatement costs so their insurance coverage increases and they have to pay more on a monthly basis.

Situations like this are common in big cities where there are buildings close together and buildings are also older too so it is more likely there are areas of conservation or listed buildings that have to be treated with special construction methods.

The geography of the area

Factors like the quality of the land could impact how easy it is to rebuild a home. If there are concerns, during the visit from a surveyor, they may recommend that the landlord also speaks to a geologist in order to gain a further understanding of how suited the soil is to the construction of the building.

As well as this, it could be that the soil is okay in quality and there is the opportunity to put in new foundations effectively but the topography of the land makes things difficult. If the surveyor thinks there has to be soil that needs moving around or holes that need digging, this can add to the reinstatement costs.

If the building is a listed property

Listed buildings cost significantly more to insure. This is because the reinstatement costs are also higher and the landlord will have to pay more for insurance on a property like this as a result.  As you can see from the image below, listed buildings have unique features and materials that will never look like the original because of how dated these types of properties are and how unique to their time they are.

A building like this will need specialist restoration techniques. To put things into perspective, listed buildings aren’t allowed to have repairs or restoration carried out on them to preserve their cultural history. As you can imagine, if a building like this were to get destroyed, it will cost a lot to restore and the property will likely never look the same.

Click here to learn more about what defines a listed building like this according to the government website.

A listed building that has high reinstatement costs

If there is asbestos in the property

Asbestos is an old insulation material which was banned in 1999. Therefore, if a property was demolished, there is a chance that the material may still be lingering in the material and will have to be removed before the property can be reconstructed by a professional.

This will increase the reinstatement costs as the cost of the removal of asbestos will likely be factored in. If asbestos isn’t dealt with correctly, symptoms include coughing up blood from the lungs, having a loss of appetite, difficulty swallowing and a persistent cough. 

When there are serious health consequences for dealing with asbestos in this way it is clear why there is an emphasis on dealing with asbestos with such care and investing in the right professionals to remove it. 

What local authorities think about the property

Sometimes, due to the nature of the location of the property, you may need to temporarily interfere with public space such as a pavement in order to rebuild a property. This is all factored into reinstatement costs.

This is very dependent on the local authority that the property is in as well as where the property is located. If you are dealing with a very secluded property that has a large amount of land surrounding it, it is very unlikely the reconstruction of a property will increase reinstatement costs because there is a chance you will have to pay the local authority during the property’s rebuild.

What is a typical reinstatement cost per square metre?

Typically, the cost of reinstatement in a property is £2,000 – £2,500 per square metre of a property for a multiple story house. To truly find out what this is for your property, it is necessary to hire a surveyor to visit the premises in person and conduct the right inspection.

Most of the time, a chartered surveyor will provide the most accurate data but this isn’t necessary. Nonetheless, if you need a valuation for a property that is extremely large with multiple floors and rooms, this may be a good idea anyway.

How to get a quote for home insurance using reinstatement costs

The easiest way to do this is to use the Building Cost Information Service (BCIS) calculator here that takes into consideration the type of property you have, the age of the home, the number of roofs and walls in the property and the internal and external floor area.

You will have to get familiar with measuring your property and how to do this but once you have a tape measure and access to the property it is fairly straightforward. The guide on the BCIS website also guides you through it if you aren’t sure what to do. Based on this data, the calculator will assess the cost of replacing all of these materials if there was a fire for example.

A property burning to the ground with insurance due to reinstatement costs being calculated

Reinstatement cost assessment example

In order to see how an example of the reinstatement cost of a property can be calculated, the first step is to work out the square footage of the property.

This can be done by:

  • measuring the lengths and widths of all the rooms in the property separately
  • Multiplying the lengths and widths of each room to get individual areas for each room
  • Adding together every area of the property to get a total

If you use this figure with the BCIS calculator here, you should come up with a figure that is similar to the value of your home. For lower end properties,  this value may be around £100,000 and for properties in the higher end perhaps in London where property prices are significantly higher, a figure closer to £300,000 may be expected.

To put this into perspective, the average reinstatement cost of a property in the UK for a 1,400 square foot house is £243,889. As of 2022, the average property price in the UK is £296,000 so you can see how reinstatement costs are quite similar to a property’s true value but are slightly behind.

To conclude

All in all, the topic of reinstatement costs is confusing at first because they are calculated differently from how you would calculate a property’s value traditionally. It is useful to note that a surveyor is vital for the process of getting a property evaluated with reinstatement costs.

Finally, if you don’t calculate the reinstatement costs of a property, this could result in insurance companies not wanting to insure your property because they prefer to go by the cost of rebuilding a property rather than its value.

Knowing these main points should set you up well to understand reinstatement costs and use this information well to get the insurance you require for a property.

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