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Definition of Replacement Cost

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Definition: Replacement costs are what it costs to replace a structure with a similar type of construction, and they vary from year to year, especially if you're looking at the cost to replace a home. When real estate markets are appreciating, it can often cost more to buy a resale or used home than to build a new home. But when markets decline, sometimes it is cheaper to buy an existing home than to build new.

Replacement cost is generally part of a homeowner's insurance policy. If it costs more to build a new home than the cost of your home, then you will want to make sure the replacement cost coverage of your policy is higher than the price you paid. If prices are appreciating in your neighborhood, you may also want to increase your basic insurance coverage but the replacement cost coverage might go down.

When an appraiser prepares a comprehensive appraisal, replacement cost, the cost to replace the existing building with a similar building, is calculated but rarely used as a stand-alone appraisal. That's because comparable sales carry more weight in a residential appraisal than replacement cost.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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