The differences between an appraisal and a home inspection are significant. The two are nothing alike; from purpose to regulation to procedure they share little beyond being common to most real estate transactions. The two are often confused by buyers and incredibly, some agents are just as baffled about by the process and role that each plays.
An appraisal and inspection are as different as night and day. While both are common with a home purchase, the purpose and procedures behind each are drastically different. A home buyer should understand both to avoid confusion.
The appraisal process is an integral part of any mortgage loan and is highly regulated by both national and state oversight. There is a lengthy training period to become an appraiser – far longer and significantly more difficult than getting a real estate license. Appraisers, unlike agents, are required to complete a lengthy apprenticeship as well as classes and exams. In Georgia, home inspectors are not regulated in any manner; there is no licensing or oversight to become a home inspector.
Differences Between an Appraisal and a Home Inspection
- An appraisal is required for a mortgage loan, not required for a cash deal. Typically appraisals cost $350-$600 depending upon the assignment. It is often a good idea to get an appraisal on cash deals for an impartial second opinion to that of the buyer’s agent.
- Appraisals are intended to ensure that the lender has adequate equity in the home in the event the owner defaults.
- Appraisals indirectly protect the buyer from overpaying. Many consider an appraisal as a check against the opinion of a buyer’s agent.
- An appraisal does not determine market value, it simply renders a data based opinion as to whether or not the contract price is supported by current comparable sales data.
- The lender uses the lower of the appraised value and contract price for the loan. With an appraisal of $350,000 and contract of $375,000, the lender will use the $350,000 for the loan. On a contract price of $350,000 and appraisal of $375,000, the lender will use the $350,000 for the loan.
- In the event of a low appraisal, one of three things happens: the buyer terminates the contract, the seller reduces price to the appraised value, or the buyer and seller negotiate the difference and the buyer brings cash to the closing. With high loan to value deals, a low appraisal can mean termination as most buyers lack cash to bring to closing.
- Appraisals are highly structured and regulated. Appraisals are typically ordered through third party vendors. Agents and loan officers are prohibited from influencing the appraiser. They are subject to detailed underwriting, third party review and review by FNMA.
- Appraisals can only be completed by state licensed members. Trainees are required to be directly supervised and once officially licensed they are either licensed, certified, or general depending on experience and education. General is the commercial property designation.
- Appraisers will note obvious condition issues, they do not inspect beyond the scope of work. If repairs or further inspection is required, it is detailed with photos and recommendations. Anything the appraiser considers out of the ordinary is photographed and noted along with the impact on value and marketability.
- Only the home buyer gets a copy of the appraisal, it is their decision if they want to share it. If the appraisal is below the contract price, it is typically shared with the seller as part of the negotiation.
- A real estate agent is not capable of nor permitted to complete an appraisal. A broker price opinion (BPO) is not an appraisal and should never be considered one. Unfortunately, a significant number of agents do not understand how an appraiser works or how to challenge an appraisal that is below sale price.
- A home inspection is not required for any sale. While it’s a good idea to have an experienced, disinterested party review any home, there is no requirement for this.
- Inspectors are not regulated in any way; there is no licensing requirement in Georgia. There are organizations that provide designations but understand – just like NAR for agents – many say that the main concern of the organizations is collecting fees. Just as with agents, there are part time inspectors.
- Buyers typically select the inspector. Usually the buyer’s agent will make a recommendation but for obvious reasons every buyer should do their homework before hiring anyone. This is a chance for the buyer to walk the home and ask all of their questions without the agent influencing the situation.
- Inspectors typically inspect from foundation to roof and most use a preformatted type of form. Additional inspection items include radon, termites, pools, septics and other things as they are found. Note however that even inspectors will defer to experts like roofers, engineers, pool techs, etc. if issues are found that are beyond the scope of the inspection.
- Copies of the report are provided to the buyer and typically shared with the buyer’s agent. A list of issues to be addressed is compiled and these are negotiated with the seller. There are always issues found, including with new homes, so it’s important to separate the typical deferred maintenance from the genuine concerns.
It’s critical to understand that inspections are very subjective; some inspectors will detail every hairline concrete crack, others will stick to the things considered significant. The challenge for the buyer and agent is to understand what is typical for the home under consideration and be realistic and reasonable.
The importance of being educated about the home buying process cannot be over emphasized. It begins with knowing how to find a real estate agent. Work with only experienced and productive agents. Research every agent you are considering since working with an inept or inexperienced agent will cost money. The same is true for inspectors. Spend the time researching them, their resumes, their credentials, and work with only pros. Less control exists over the appraisal process. That firewall was established after the crash as inflated and poor reports contributed to the problems and subsequent melt down.
The Hank Miller Team Advantage
We provide confidence to our clients buying and selling homes in the North Atlanta real estate market. Our unmatched sales and appraisal experience, relentless drive and ability to manage transactions allow our clients to make sound, decisive real estate decisions. We offer full time, full service, personal, hands-on attention and concierge level service every step of the way for perhaps the most important financial decision you’ll make.
Questions? Need more info? EMAIL US, call 678-428-8276, or fill out the form below.