Thursday, 09 April 2020

What Are the Differences Between an Appraisal and an Inspection?

Written by Posted On Thursday, 27 February 2020 05:30

Both services concern the state of the property but fulfill different requirements. An appraisal is used by lenders to determine the current market value of the property while the property inspection makes a physical inspection of the property from the bottom up. It’s the lender that requires an appraisal. With an inspection, it’s up to the buyer whether or not to order an inspection.

A property appraisal can be completed at a desktop or it can be a full appraisal requiring a licensed appraiser to research recent sales in the area and make a physical inspection of the property. How does the lender decide which one is appropriate? When a loan application is submitted through an automatic underwriting system, the results indicate the degree of a needed appraisal. A transaction where there is a good amount of equity in the purchase, say 10 percent or more, it’s possible that a limited appraisal will be needed. Other times, a full appraisal is needed.

Before the appraiser visits the subject property, research is performed to identify at least three recent sales in the area where the property is located. The sales need to be similar in nature to the subject property, the sales should have occurred within the previous 12 months and be located less than one mile from the subject. After the initial research is done, the appraiser will visit the home. The appraiser will take pictures, both inside and out and provide an overall description of the property. The appraiser will also take pictures of the comparable sales discovered via research. 

Then, the appraiser will make certain adjustments to the final value. These adjustments attempt to make up for slight differences in the various properties listed in the appraisal report. For example, a neighborhood is made up predominantly of four bedroom, 2 ½ bath homes. Both the subject property and at least three recent sales might show up as all have four bedrooms and 2 ½ baths. But two of the homes have an outdoor pool and a guest house while the subject property does not. 

The appraiser will then make an adjustment by subtracting some value from the subject due to the lack of a pool and guest house. The subject property however has a three car garage while the others only have a two car garage. The appraiser will make an adjustment in value due to the larger garage. There are appraisal standards issued that provide an approximate markup or markdown of values due to included or missing amenities or features. Once the appraisal is complete, it is ultimately delivered to the making the appraisal request. 

What if the appraisal doesn’t match the price listed on the sales contract? In case of a price contradiction, the lender will use the lower of the two values. If the value is higher, the buyers do not get to access that “equity” during the transaction, however. It’s just becomes an added “perk” for the buyers. On the other hand, if the appraised value is lower than the sales price, the lender will use the lower value which means the buyers must decide whether to walk away from the transaction or come to the closing table with the additional down payment, making up for the difference.

With an inspection, it’s not a lender requirement but it’s certainly recommended for buyers. An inspector will make a physical inspection of the home flipping light switches, turning on faucets and making sure the appliances are in good working order. The inspection is rather thorough, and the result is a multi-page report showing all the items reviewed and if they’re in good working order, could use a little work or do not work at all. Smaller items such as a leaky faucet can be repaired after purchase but something larger such as the hot water heater is out or there are cracks around door jambs that could indicate a problem with the foundation. The sellers can then take the inspection report and if there are enough items that need some serious attention, it may very well be time to go back to the bargaining table. That, or if the problem is big enough, to walk away from the offer and find another home.

Rate this item
(2 votes)
David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.

www.cdreed.com
VOXEL Agent Marketing

Search by State:

Agent Resource

How to capture your next prospect - click here

Realty Times TV

1/10

Realty Times

From buying and selling advice for consumers to money-making tips for Agents, our content, updated daily, has made Realty Times® a must-read, and see, for anyone involved in Real Estate.