Home Inspection vs. Home Appraisal: A First-Time Buyer's Guide
While a home inspection report is vital before purchasing an older home, experts agree that even newer homes should be checked. Not only will the report help you learn about repairs that should be made immediately, but it’s also a handy reference guide to keep on-hand throughout the time you live in the home.
Because there are so many aspects to a professional home inspection, many first-time homebuyers know little about the process. We’ve chosen two aspects that we find most of our buyers don’t know a thing about.
1. Report Format
Professional home inspectors use different formats when detailing information about the house. All reports, however, should contain several common features:
Ask inspectors that you interview to supply you with a sample report. Ensure that the above items are included and that the inspector not only lists what’s wrong but why it’s a problem and what should be done to remedy it.
2. Choosing an Inspector
Choose your home inspector carefully, as any mistakes made will cost you money. At the same time, keep in mind that the home inspector performs a visual survey. He will not tear up walls or floors to look for problems. A professionally trained inspector, however, knows what to look for and can spot warning signs.
The price you pay for a professional home inspection during the home purchase process is worth every cent. Use due diligence and hire the most experienced, professional home inspector in your area and complete your home purchase with confidence.
Where will you find this super-sleuth? Ask everyone you know, including your real estate agent.
By the way, it’s a good idea to tag along with the inspector during the inspection. This way you can ask questions while on-site, rather than later, after looking at a report. Most inspectors welcome a “ride-along” with the potential homeowner.
Home Inspection vs. Home Appraisal
Both are made up of several complex systems. Whereas the body has a skeletal, nervous, digestive, and respiratory system; a home has heating, plumbing, electrical and structural systems.
Just like a patient, a house can look perfectly healthy while hiding major problems. The older a home, the more likely it has some concerns. But even newer homes, just like young patients, may have issues.
Two fundamental steps of the home buying experience that often shed light on a property's issues include:
Although similar in many respects, they are not the same. In this article, we set the record straight regarding the differences between a home inspection and home appraisal.
Understanding the home inspection process
While it’s a physician’s job to diagnose problems with a patient’s body, assessing the condition of a house is the work of a home inspector.
What is a home inspection?
A home inspection is a complete visual examination of a property by a qualified third party. An inspector is focused solely on the property’s condition. Needless to say, it's an integral part of each and every home buying process.
What does a home inspection include?
A home inspector will conduct a thorough examination of the property and provide a full written report on its condition.
A home inspection will typically include:
So just about every single thing imaginable, right? Well, not quite.
What doesn't a home inspection include?
Despite the in-depth list above, home inspectors are actually considered generalists. Think of them as the equivalent of a general practitioner.
Sure, they may find evidence of a problem. But in doing so, they will likely refer you to a specialist like a plumber or an electrician for an official diagnosis.
Home inspectors don’t look at inaccessible parts of the property, such as:
Although they may note evidence of, they typically do not provide feedback on specialized issues like:
If the house has any kind of age to it, chances are the inspector will find adverse conditions. But that doesn’t mean the house isn’t worth buying.
Often, an inspector’s report shows you what may need repair or replacement down the road, such as an older furnace or roof, that is serviceable for the time being.
Even if you’re buying a newer home, you should still have a home inspection. There is no guarantee that the home was constructed properly or that it was well maintained by the previous owner.
If possible, you should be present when the inspector goes through the house. This helps provide context on what is contained in the written report and gives you the opportunity to ask questions.
Why do you need a home inspection?
Mortgage lenders often require a home inspection before you can close. This ensures that the property securing the loan is in relatively good condition.
If for some reason a home inspection is not required, it’s still advisable to do so. In fact, your purchase agreement should include a contingency based on the findings of a home inspection. This will include terms and conditions under which both the buyer and seller are obligated.
If there is a clause in the sales contract, and the home inspector finds major issues that were not disclosed by the seller, the buyer has a number of options. They may be able to get out of the contract completely. They could also negotiate a lower sales price or require the sellers to fix the problem(s) with the house prior to the final closing.
Understanding the home appraisal process
Just like an inspection, the appraisal process is one of the most important steps of closing on the purchase or sale of a home.
What is a home appraisal?
A home appraisal is an objective assessment of a property’s true market value by an impartial third party. That third party should be a highly trained professional who is licensed and/or certified to determine a property’s value without bias.
What does a home appraisal include?
Home appraisers often begin with the property’s tax assessment, a public document used by the taxing authority to assess its property tax value.
Although the assessed value of a property often differs from the appraised value, this document can provide key information to an appraiser, such as its:
Appraisers will always conduct their own version of an onsite inspection of the property as well. They will then compare their findings with what is listed in the property assessment and note any differences.
They will also review the condition of the interior, as well as the age and condition of windows, lighting fixtures, mechanical systems, and plumbing fixtures.
The appraiser will take special note of improvements that add value to a home. These include:
They will also pay attention to issues that negatively affect the home’s value, such as evidence of structural problems, water leakage and damage, broken windows, and aging roofs.
Another key part of an appraisal is comparing the house to others in the immediate area. An appraiser will check public records for recently sold homes that have similar locations, square footage and amenities as the one they are reviewing. This can be challenging in certain areas, especially rural areas, where there are few comparable properties to the one being appraised.
Because local market characteristics factor so much into an appraisal, the appraiser should be familiar with the local area. In fact, Fannie Mae requires appraisers to certify their experience assessing properties in the same geographic area.
What happens after a home appraisal?
The appraiser will provide a written report with their analysis and conclusions about the property’s value.
If the home appraises at or above the purchase price, then you’ve completed a major step in the buying process and can move forward toward closing.
But sometimes a home will appraise for much less than the agreed-upon purchase price. This can happen if issues affecting the home’s value surface during the onsite inspection.
If a lender was asked to finance a purchase of $500,000 and the home is only appraised at $400,000, the lender will not approve the loan.
As a potential homebuyer, your purchase agreement should have a contingency that states:
This provides a legal way out of the sale if the appraisal comes in too low. Another recourse is to renegotiate for a lower price based on the appraised value.
Why do you need a home appraisal?
The lender on your loan will require an appraisal of the property before closing. The reason is that the house is being used to secure the loan.
So, in the event that you default on the loan and the lender has to take over the house, they want some assurance that they can sell it for a price that it enables them to recoup some of the money they loaned you. The appraisal helps the lender protect itself against lending more than it might be able to recover.
A home appraisal also benefits you, the buyer, to avoid overpaying for a property. Just because a seller sets a price doesn’t mean it’s worth that much in the current housing market.
Because the lender is the party most concerned with the home’s appraisal value, the lender will typically hire the appraiser. However, the appraiser’s fee will be added to the lists of costs and fees that either the buyer or seller pays at closing.
While they have plenty of similarities, home inspections and appraisals are not the same. Sure, an inspector and appraiser will review many of the same attributes of a home. But their objectives are different.
As long as you understand the importance of both a home inspection and home appraisal process and have a general idea of how they work, you'll be in good shape when the time comes for one of each.
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