Buying a home requires the assistance of many professionals. Your realtor helps you find and choose a home, but once you do that, you need the assistance of many others including the inspector and appraiser. Both professionals provide a written report regarding the condition of the home, but in different ways.
Keep reading to learn the differences between the two.
What is an Appraisal?
The appraisal has one job – to determine the home’s market value. The appraisal report is an impartial report on the home’s value based on its features and conditions. Appraisers walk through the entire home, take measurements, and walk the home’s exterior. Appraisers take many pictures and notes as they walk through the property too.
Appraisers ‘inspect’ the home to a certain degree. They check the validity of the major systems, but don’t get into the nooks and crannies of the home. In other words, they look for obvious issues, but don’t dive deep into the details.
The appraiser uses a combination of his own data and data from comparable sales properties in the area to come up with the home’s market value. The appraisal report includes general statements about the home’s condition and it may include details about certain issues, especially if they affect the home’s value.
What is an Inspection?
The home inspection is a more thorough evaluation of the home. It doesn’t measure the home’s value. Instead, the inspector looks at some or all of the following:
- HVAC system
- Plumbing and electrical system
- Decks or porches
- Floors and ceilings
Inspectors look for major issues, such as mold, termites, or cracked walls. They also note the time left on a roof, major appliances, and utilities. Inspectors note everything that they find wrong with the home so that you can make an educated decision.
The Main Differences
The appraisal and inspection sound similar, don’t they? Both professionals walk through the home and evaluate its condition. The appraisal, though, is the only report that provides the home’s market value and the inspection report provides more detail on the home’s condition.
The appraisal should never be substituted for the home inspection, though. It doesn’t provide the same details that an inspection would provide. The appraiser operates on opinion with a little fact thrown in from the data gathered. The inspector operates solely on facts based on the evidence before him.
Do Lenders Require an Appraisal and Inspection?
Appraisals and inspections have one more difference – one is required and one isn’t. Lenders require an appraisal in order to fund a loan. The appraisal is the only way they know that the home is worth enough money. If the home’s value isn’t at least as much as the sales price, the lender puts itself in a bad position. Typically, lenders base the loan amount on the appraisal. In other words, if the appraisal comes in lower than the sales price, you can only borrow based on the appraised value.
Here’s an example. Joe bid $200,000 on a home. He was borrowing 90% of the price. The appraisal came back to the lender at $190,000. Instead of giving Joe a $180,000 loan, they will only provide a $152,000, assuming Joe still wants to buy it. This means Joe must come up with the remaining amount in cash if he still wants the home.
Just because an inspection isn’t required, though, doesn’t mean you shouldn’t get one. While you can get a loan without an inspection, we don’t recommend it. The inspection protects your investment in the home. Wouldn’t you rather know if a home had major issues before you bought it? If you included an inspection contingency in your contract, you may even be able to back out of the sale if you wanted.
What Should Come First, the Appraisal or Inspection?
Generally, you order the inspection before the appraisal. Like we discussed above, the inspection protects your investment. If you have the contingency in the contract, you only have a limited time to get the inspection report and make a decision. Why pay for an appraisal on a home that you may or may not buy?
Once you are solid about your decision (or the inspection contingency expires), lenders can order the appraisal. The appraisal is usually the last condition lenders need to clear the property for a loan. It’s also more expensive than the inspection, so you want to be sure of your decision.
Appraisals and inspections have many similarities, but they are also different. One isn’t better than the other – they both have their purposes to help you make a solid decision.