Your home buying process will have many different steps involved, some of which might differ depending on your specific situation. Some steps are required, some a not required but strongly recommended, and others are entirely optional. Especially if you are a first-time homebuyer, staying on top of all the homebuying steps may seem daunting when you aren’t very familiar with them.
One of the most common questions that new homebuyers have is: what is the difference between the real estate appraisal and the home inspection? While they are both critical steps of the home buying process, they each serve a different purpose.
Inspection vs. Appraisal
Essentially, the goal of the home inspection is to assess the condition of the home, and the purpose of the appraisal is to determine the home’s value.
The home inspection is a physical assessment of the home and its various system to determine its condition and functionality before purchasing the home. The inspection is conducted by a home inspector who will visit the property and take note of everything that can observe that is accessible in a non-invasive manner. Typically, it is up to the homebuyer to hire the home inspector for the home inspection. It is in their best interest to do this before purchasing the home to learn more about the home condition, especially concerning defects that the average person may not be privy to.
Most professional home inspectors adhere to a standard of practice throughout their inspection that gives clear guidelines to their work scope. This is beneficial to keep their work consistent and ensure quality service while helps to keep their client on the same page through the inspection process. Many inspection standards will cover the following areas:
- Plumbing System
- Electrical System
- Heating and Air Conditioning Systems
- Insulation and Ventilation
Any defects found through the inspection will be documented in the home inspection report, covering minor defects and major issues. With a complete understanding of the home’s condition, the homebuyer can choose how to proceed. In most cases, your inspector will likely find some defects, even in new homes. No home is perfect and probably will allow your transaction to move forward. If you come across significant issues that require invasive, costly repairs, you may choose to renegotiate your offer to reflect these costs in some manner. If you feel like the issues with the home are too expensive or bigger projects that you feel comfortable handling, you may even want to walk away from the transaction, though this is a rare occurrence for most homebuyers.
Real Estate Appraisal
The real estate appraisal assesses a home’s value based on the property itself and external factors such as the neighborhood and what similar houses have sold for in the market. The goal of the appraisal is to determine the fair market value of the home so that the price the buyer has agreed to is not beyond the house’s actual value. A third-party property appraiser conducts the appraisal, often hired by the mortgage lenders or by the home buyers as their lender requires.
Like a home inspector, the appraiser will go to the property to assess the home’s overall condition and major systems, though to a lesser degree. In addition to the condition, the appraiser will take stock of other property factors, such as the number of bedrooms and bathrooms and any recent renovations completed. Appraisers will assess the home’s land, factoring in the lot’s size and functionality. Once the appraiser has gotten all the necessary details on-site at home, the remainder of the reporting process happens at their office.
Taking the information gathered at the property, the appraiser will look at what similar homes in the area have been sold for. The appraiser also analyzes factors that impact the quality of life in the neighborhood: proximity to shopping and parks, walkability and transportation availed, quality of schools in the areas, etc.
Much like the home inspection report, the appraisal opens some avenues for the homebuyer to explore. If the appraisal is lower than the sale price, you can negotiate the price to come down as well. If your contract features the appraisal contingency, you can also walk away from the deal if the sale price and appraisal valuation are wildly off.
Similarities and Differences
Both the home inspection and real estate appraisal provide more information and insight for you as you reach the end of your home buying process. By better understanding the fair market value of the home and the overall condition of the house and its systems, you are better prepared to become a homeowner and sign on the home.
- Conducted by an unbiased third-party professional, who provides a physical assessment of the property.
- The goal of both is to inform the homebuyer about the property and protect their real estate investment.
- Typically, both services are conducted after the purchase contract is executed.
- The homebuyer will schedule and pay for these services or have them done on behalf of their mortgage lender.
- The final reports given to the homebuyer can be used to renegotiate the purchasing contract.
Scope- Appraisals focus on the general condition of the home and factors of the local real market, such as location and available amenities. While the appraisal takes the more “big picture” approach in determining the home’s market value, the home inspection is much more detail-oriented toward the property itself. The inspection will test every component in the house, from outlets to facets, and the inspector will climb on the roof and crawl into the crawl space to check for any issues.
Time- Given how much an inspector must cover through the inspection, they will spend anywhere from 2-4 hours on average on-site at the property. On the other hand, the appraisers will spend much less time on site, stay long enough to get the necessary information for their report.
Protection- While the valuation of the property is a helpful tool of the homebuyer, it is primarily a tool to protect the mortgage lender with their loan. They want to verify the load requested by the homebuyer is appropriate for the value of the property. On the other hand, the home inspection protects the homebuyer from purchasing a money pit but alerting them to any significant issues allows the buyer to negotiate repairs before the deal is closed.
The home inspection and real estate appraisal are vital steps in the homebuying process, which benefits the homebuyer greatly. Both are highly recommended for every buyer in any real estate transaction to protect you. For many people, buying a home will be the largest single purchase they will likely ever make. It’s wise to get the complete picture of the property you are looking to purchase before you sign.