Are you shopping for a home or considering your options? If so, you will come across the terms home appraisal and home inspection. Some people may think these are the same, but they are very different.
An appraisal is different than an inspection as it is more focused on the value of the home than the condition. While an appraiser will typically make note of safety and soundness concerns they observe, their primary role is to focus on what your house is currently worth in comparison with recently sold homes that are most similar and in the same or similar area.
Appraisals are usually required and your mortgage company will order your appraisal for you. The cost of the appraisal is bundled into your closing costs.
Appraisers prepare a written report showing what they determine is the fair market value for the house, including the comparable sales data they used to come to their conclusion.
Home Appraisal Report
Your appraisal will include a lot of information about the home you are looking at buying or refinancing.
The report starts with basic information about your home, like the property address, neighborhood, and any improvements that have been made. Make sure you and your Realtor review that the information is correct on the report. If it is not, report it to your mortgage company right away.
Then the report will list comparable homes. In this section, there will be several properties in different columns and then rows of criteria that make those properties like yours. For example, there are number of bedrooms and bathrooms, size of the lot and square footage of the home, among many other things. The appraiser will make adjustments based on those things criteria.
Comparable homes are those around you that are similar in:
- Above Ground Square Footage
- Basement Size and Level of Finish
- Room count
- Land/ Site Size
- Porch, Patios and/or Decks
- Heating, Cooling and Energy Efficient Items
- Sale date - preferably within thee last 6 months. If there are not a lot of homes sold in the area, they may need to go further back than 6 months.
Most lenders require the subject home to be bracketed by comps (ex. the Appraiser must list a home that is bigger and one smaller, older and newer, etc). Appraisals are required to have a minimum of 3 comparable homes. If the property is unique or if there are limited recent comparable sales, the will most likely include additional comps.
An inspection is when a trained professional looks at the home you are buying to determine its condition.
Inspections are usually optional and up to the buyer. Some counties do require that specific items be inspected to make sure they meet county code. Certain loan programs may also require an inspection. Your Realtor can tell you if there are any required inspections in your area.
The buyer or Realtor orders the home inspection.
What is a whole house inspection?
A whole house inspection is the most common inspection that is optional. With a whole house inspection, the inspector reviews (you guessed it) the whole house!
They look at the furnace, water heater and electrical panel. They climb on the roof if weather permits, check attics and crawl spaces, check the water pressure and basically do a full head to toe review of the condition of the home. The inspector then provides you with a written report summarizing their findings and making recommendations on anything they feel needs addressed.
Sometimes a whole house inspector may recommend further review by a more specialized inspector, like a furnace technician or a roofer. You can also choose to have specialists only look at the house, if you wish, or you may choose to have additional inspections like a termite inspection or a radon test done. Your Realtor is a good resource to go over all of your inspection options once you've found the house you like.
Home Inspection Report
The American Society of Home Inspectors (ASHI) point out a few things to look for on your Inspection Report as well as a great home inspection checklist.
Here is a list of the most common problems on an inspection report. Note that they are common, so they are also easily fixed and should not be deal breakers.
- Faulty Wiring: Wires without wire nuts, open junction boxes.
- Faulty Plumbing: Low water pressure, water stains on ceilings.
- Poor Drainage: Soggy areas in the yard, leaks in basement.
- Bad Gutters: Clogged gutters, basement dampness.
- Foundation Flaws: Small cracks, sticking doors and windows.
- Poor Maintenance: Chipped paint, worn shingles, cracked driveway.
- The Roof Needs Replacing: The average cost of a roof replacement is $7,000.
- The House Is in a Flood Zone: Use FEMA’s flood maps to determine if the home is at risk or requires additional flood insurance.
- Major Foundation Issues: Hire a structural engineer to determine if those cracks are actually serious.
- Aluminum Wiring: This type of wiring almost always needs to be replaced, a process that can cost thousands of dollars.
For more on why you need a good home inspection before you buy, check out our blog post on the topic!
Both home appraisals and home inspections help give you buying power. If an appraisal was ordered and comes in less than the agreed upon purchase price, the seller may need to come down on the price for you. This is due to regulations that prohibit lenders from loaning you more money than the property is appraised for/worth. This is a good thing for you, as over time you will want to build equity in your home and if you are already in the hole, you will not be able to do so as easily.
This buying power comes with inspections as well. A home inspection is a great way to find out (before you buy) if there are any major repairs likely to need attention now or in the near future.
Knowledge is Power
If you have an inspection performed and something comes up, say the roof has a leak and the inspector reports that you will need to replace it within a year, you can use that knowledge to break the purchase agreement or to try to negotiate the cost into the purchase price. As a new homeowner, you may not want to take on a project like that, so you need to be sure to take it back to the seller and to your Agent and see if you can negotiate a seller's credit to be given towards the roof. This is a great way to get some financing ahead of time for some of those really large projects.
Now don't be surprised if you are trying to buy a property listed in "as is condition", as likely the owner will not want to give money towards an repairs to the property. In this situation, really weigh out your pros and cons. It is still very important to get a home inspection so that you are aware of all the problems with the home, even if they will not give money in the process.
Both are in Your Interest
Home Inspectors and Home Appraisers are great assets when you are considering purchasing a home. The best part is that they are unbiased, third party representatives and make a flat fee for their services regardless of their findings. They lay out all the facts on the value and the condition of the home you are considering, so that you feel more confident in buying the home! It really is a win-win and in your best interest to have both professional's input!
A new home is a big investment, so know what you're buying. The last thing you want is to make a quick decision and then fall into Buyer's remorse afterwards.