Don’t Be Confused About Home Inspections and Appraisals

A home appraisal is an unbiased and professional estimate of the current market value of a property. A home appraisal is not the same as a home inspection. While both can stop you from overpaying for a home, they aren’t interchangeable. 

Home Inspections and Appraisals

The Home Appraisal

While cash buyers can technically waive a home appraisal, appraisals are required by lenders for buyers with mortgages. An appraisal protects an institution from lending a borrower more than the value of a home.

With a home serving as collateral for a mortgage, lenders take risks when a home is worth less than the loan amount.

A home appraisal is usually ordered by the mortgage company. However, the buyer is the one who pays the appraisal fee as part of closing costs. Appraisals generally cost between $300 and $600. Expect to pay more for a complex or unusual property that requires an in-depth analysis.

During the appraisal process, a licensed appraiser conducts an inspection of the property in person to assess its features. Size, number of bedrooms, number of bathrooms, special features, and recent improvements all help to determine the home’s current value. Additionally, appraisers rely on recent sales of comparable properties to arrive at a fair market price. Generally, only data from the past 90 days is used when looking at “comps.”

How Close a Bank Appraisal Inspection Price Needs to Be to Asking Price

Once the appraisal is complete, the appraiser will submit an appraisal report to the lender. Most lenders will reject a mortgage application if the borrowed amount is more than 80% of the property’s current appraised value.

The Appraisal Gap

If the offer price on a sales contract is higher than the home’s current market value, the difference is what’s known as an appraisal gap. Unfortunately, an appraisal gap means that a deal might not go through. When confronted with an appraisal gap, a buyer can do one of three things:

  • Fill in the gap with cash
  • Ask the seller to lower the price
  • Walk away

Having an appraisal contingency in a real estate contract is essential! The appraisal clause allows the buyer to walk away with their earnest money deposit if the home is appraised for higher than the asking price. 

While appraisals can be counted on for accuracy, a buyer can also ask the mortgage company to allow a second appraisal inspection if they have a reason to suspect that the initial appraisal was inaccurate. It’s possible that an inexperienced appraiser would provide an inaccurate report. Rapidly changing market conditions can also cause inaccurate appraisals.

The Home Inspection

The biggest difference between appraisal and inspection is that an inspection is technically optional. Buyers sometimes waive inspections to make their offers more attractive to sellers in hot markets.

Home inspections aren’t generally required by lenders.

Home inspections are considered part of a buyer’s closing fees. They cost between $200 and $500 in most places. The difference between inspector vs appraiser is that the appraiser’s role is to assign a dollar value to a home based on an evaluation instead of conducting a “structural” analysis. However, both are licensed professionals tasked with providing objective, fact-based reports.

A home inspection provides a prospective buyer with a detailed home evaluation. Inspectors look for damage or hazards. They may also point out cosmetic issues. Here’s a rundown of what a home inspection may cover:

  • Exterior issues
  • Roofing
  • Siding
  • Visible interior damage
  • Pests
  • Mold
  • Rot
  • Radon
  • Foundational issues
  • Electrical, plumbing, and HVAC systems
  • Fire hazards

The job of a home inspector is to provide a factual report regarding a home’s state. Inspectors are not permitted to “step out of line” to offer opinions on what a buyer should do. They are also forbidden from diagnosing the causes of issues they observe.

When a Home Fails an Inspection

If a sales contract contains a home inspection contingency, the buyer has these three options to utilize without forfeiting their earnest money deposit:

  • Request a price decrease that allows the buyer to cover some or all of the costs of needed repairs
  • Ask the seller to fix the issue that caused the home to fail the inspection
  • Back out of the purchase

Home inspections provide buyers with information needed to make informed choices. In addition to providing a way out if a home is heavily damaged beyond what meets the eye, an inspection can be an important bargaining tool for reducing the sale price.

Here’s How Home Inspection and Appraisal Are Alike

Both appraisals and inspections tend to benefit the buyer more than the seller because they provide information to the buyer that’s not necessarily available at face value. Additionally, both uncover potential issues that could halt the home sale.

Both services also have similar price tags that generally fall under the buyer’s closing fees.

Here’s How Home Inspection and Appraisal Are Different

Inspections and appraisals have different goals. An appraisal’s purpose is to determine home value. While a home’s condition plays a role in determining value, the market at large is often an even bigger factor. By contrast, an inspection focuses only on the property at hand without any consideration regarding the market.

Home appraisals are typically conducted without the buyer or seller being present. However, buyers often accompany the inspector during a home inspection in order to observe issues that are uncovered and ask questions

Finally, the biggest difference of all is that an appraisal is a condition that must be met for mortgage approval. While lenders strongly encourage buyers to conduct home inspections, financing is possible without one.

The bottom line on appraisal vs inspection is that these two different steps in the closing process reveal the truth about a home.

Appraisals and inspections impact buyers by revealing the value and habitability of a property. They are important for sellers because they determine a home’s profitability.

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Written by Murat

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