By David McMillin
When buying a home, there are many to-dos to check off before you can complete the purchase, including an appraisal, and home inspection. While they’re similar in some ways, these points in the home-buying process are not the same thing. Here’s what to know.
A home appraisal is an assessment of a property’s value. It can’t be performed by just anyone; a licensed appraiser does the job on behalf of mortgage lenders, real estate agents, homebuyers or homeowners requesting a valuation.
The appraiser assesses both the outside and inside of the home, and considers a range of factors that can influence its worth, including:
- The home’s condition
- Where it’s located
- When it was built
- Total square footage (including lot size)
- Number of bedrooms and bathrooms
- Whether it has a garage
- Whether it has outdoor space
Appraisals also consider comparable homes (comps), which are similar properties in the area that have been recently sold.
Your lender will most likely require an appraisal if you’re getting a mortgage. That’s because the lender needs to ensure the home is worth the amount you’re borrowing for it. That way, if you wind up defaulting on the loan, the lender has reassurance it can sell the property and get its money back.
One of the key functions of an appraisal is verifying that the price the buyer agreed to pay is actually a reasonable offer. Unfortunately, that’s been especially challenging in the current housing market. As buyers compete for homes by making above-ask offers, some appraisals have come back lower than expected. In these cases, the buyer can make up the difference with cash, or try to negotiate the price with the seller.
Appraisals aren’t just for home purchases, either. For example, if you recently completed a major renovation, such as a kitchen remodel, an appraisal could help you get an idea of how much value you added to the property. Generally speaking, appraisals are also required if you want to refinance your mortgage (although there are some types of refinances that don’t need one).
How appraisals differ from home inspections
What’s the difference between a home appraisal versus an inspection? While the lender requires an appraisal, a home inspection is usually a stipulation that comes from the buyer. For the buyer, an inspection helps identify issues with the property before finalizing the purchase.
An appraisal considers the surrounding neighborhood, recent market trends, and other factors that influence a home’s value. Home inspections help uncover any problems with just the condition of the home. Are there plumbing issues? Is the roof in need of repairs? Does the fireplace work? Is the electrical wiring safe?
If any issues surface, the buyer now has that information in the inspection report. If there’s an inspection contingency in place in the offer, the buyer can decide whether to move forward with the transaction and negotiate or pay for repairs, or walk away.
As the buyer, you usually have the right to be present for the home inspection. With the appraisal, though, you’re typically not invited.
You might also consider completing a home inspection before listing if you’re selling your home. This preemptive inspection can identify potential repairs before a buyer requests a credit, giving you the advantage of addressing them with your own contractor.
How appraisals and inspections overlap
There are some similarities between a home inspection versus an appraisal:
- How much it costs: A home inspection costs an average $340, according to data from HomeAdvisor, while an appraisal typically runs $349, the home professionals site reports. Keep in mind these costs can go much higher, particularly if you have a larger home in a high-priced area.
- Who pays for it: While mortgage lenders require an appraisal, the buyer is usually the one who pays for it. With a home inspection, that cost also falls on the buyer’s shoulders.
- Who performs the service: While appraisers and home inspectors have different skill sets, they’re both professionals who have satisfied the requirements to earn and maintain their licenses for the job.
- When they happen: Both an appraisal and home inspection happen early in the process of buying a home. Buyers tend to order the inspection within a few days after an initial contract is signed, and the appraisal also happens well before the sale heads to closing.
Do you need both?
It’s not an either/or question; both an appraisal and home inspection are important points when buying a home, and they protect your interests as the buyer. Appraisals are necessary in order to obtain a mortgage, but the inspection can play an equally important role in helping you avoid regret once you move in.
That said, some homebuyers opt to skip one or both of these steps. Almost 30 percent of buyers waived their appraisal contingency, according to spring 2021 data from the National Association of Realtors (NAR). Many of those buyers likely paid all-cash, which means no lender was involved in the deal.
Twenty-five percent of buyers, meanwhile, waived the home inspection contingency, NAR found. This number is likely reflective of the seller’s market at the time: Buyers sweetened the deal by agreeing not to allow an inspection to slow down the sale. While that can help a transaction get across the finish line, there are consequences to forgoing an inspection, not least of which is not knowing more about the property you’re buying. If major issues are left unresolved and you buy the home, you’re stuck dealing with them.
Even if you don’t technically need an appraisal or inspection, it’s always best to do them both. Buying a home is one of the most expensive transactions you’ll ever be involved in; the appraisal and inspection helps ensure that the dream home doesn’t create any financial nightmares down the road.
This article is also posted on Bankrate here.