In some ways, a house is like a human body that you examine and treat daily.
Both are made up of several complex systems. Whereas the body has a skeletal, nervous, digestive, and respiratory systems; a home has heating, plumbing, electrical and structural systems.
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 homebuying experience that often shed light on a property's issues include:
- The home inspection process.
- The home appraisal process.
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 homebuying 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:
- Reviewing the condition of the roof and gutters, as well as shingles, vents, and chimneys.
- Checking of structural elements like the foundation, walls, floors, doors and windows, with special attention to evidence of sagging and bowing.
- Running water through sinks and toilets to check water pressure and for leaks.
- Checking the safety of the home, including smoke detectors, condition of stairs, and the presence of handrails and guardrails.
- Assessing the grading of the property for drainage.
- Operating the heating and air conditioning units.
- Checking to ensure electrical and plumbing systems are up to current building codes.
- Ensuring that lights and fans work, that circuit breakers are functioning and noting any visible wiring.
- Checking for ground fault circuit interrupters (GFI) on electrical outlets in bathrooms and kitchens.
- Making sure appliances are in proper working order.
- Examining the basement and the exterior foundation for cracks, water damage, and potential structural issues.
- Noting the condition of the home’s siding, driveway and walkway surfaces, fencing, the garage and other exterior structures.
- Inspecting the attic for proper ventilation, sufficient insulation and signs of leaking or water damage.
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 electrician for an official diagnosis.
Home inspectors don’t look at inaccessible parts of the property, such as:
- Behind walls and electrical panels.
- Inside pipes, sewer lines and chimneys.
Although they may note evidence of, they typically do not provide feedback on specialized issues like:
- Termite damage.
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 final closing.
Understanding the home appraisal process
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:
- Lot size
- Square footage.
- Number of bedrooms and bathrooms.
- Additional structures.
- Recent improvements.
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:
- New flooring.
- Kitchen and bathroom remodeling.
- Adding living space in a basement.
- Additions to the property.
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:
- The contract is void if the house doesn’t appraise high enough, or...
- That is it contingent on completion of the financing process.
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 physician 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 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 mostly 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.
Alternative home appraisal options
In light of the COVID-19 outbreak, the Federal Housing Finance Administration has adjusted its home appraisal standards to account for social distancing.
Two alternative home appraisal methods that are available instead of an on-site appraisal include:
- Desktop appraisals. As its name suggests, this method is performed from a desk. The appraiser will perform market research, pull comps, and evaluate tax and MLS records to determine property value.
- Drive-by hybrid appraisals. This method is similar to a desktop appraisal, but includes some additional measures. It may include photos, previous interior inspections, virtual tours, or even just driving by the house.
In both instances, the licensed appraiser never actually steps foot inside the home.
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.
- A home inspector is solely focused on the property’s condition.
- A home appraiser is focused assesses its true market value.
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.