The Skilled Labor Shortage #2
Home Inspections vs. Appraisals: The Differences Between the Two
A lot goes into buying or selling a house. Whether you are the buyer or seller, it is important to understand the steps along the way. Inspections and appraisals are two processes during the transaction that can cause confusion for both parties. While similar, we compare inspections versus appraisals to help you understand the differences and why they are important.
What is A Home Inspection?
A home inspection is a detailed look at the condition of a house done by a licensed home inspector. It is initiated by the buyer to give them a better idea of the state of the house as well as what work may need to be done on the property.
While not required, 83% of buyers chose to order an inspection for the home they purchase.1 This is done after they have made an offer. Home inspections generally cost $270-$400 and take around 3-4 hours2—but they can take more or less time depending on the size of the home. During their walkthrough, inspectors will not only look at the condition of a home, but they’ll also test the functionality of key systems.
A home inspector will look for:
- Problems with a home’s HVAC, plumbing, or electrical systems
- Structural damage or concerns
- Roof damage
- Visible insulation in attics
- Issues with windows, doors, ceilings, floors, and walls
- Water and mold damage
- Signs of pest infestation
- Health or safety concerns
A home inspection does not include:
- Determining the value of the home
- Comparing the house to others in the area
- Looking at the location or neighborhood
- Evaluating the size of the house
After the home inspection is complete, the inspector will provide a report that will make the buyer aware of any red flags. Typically, buyers are also able to attend the inspection if they’d like. If they do, the inspector will explain some of the issues they find along the way.
If issues are discovered, the buyer can attempt to negotiate with the seller and ask them to complete home inspection repairs before the home is officially sold. Sellers also have the opportunity to walk away and look for another home.
What is A Home Appraisal?
A home appraisal is a thorough look at a property to determine a home’s fair market value. It is often initiated by the lender but typically paid for by the buyer after an offer is accepted. It costs anywhere from $300 to $800 depending on the size of the home and cost of living.3 An appraisal ensures that the house is worth enough to secure the new loan. In some cases, a home appraisal may also take place when someone is selling a house in order to get an accurate listing price.
A licensed appraiser will be a third-party professional who looks at both internal and external factors to determine a home’s value. This number may vary from your listing price and the buyer’s offer because of the differences between appraisal value and market value.
Your appraiser will look at:
- Square footage
- Number of bedrooms and bathrooms
- Code compliance
- Age of appliances, roof, and vital systems
- Condition of flooring and fixtures
- Comparable listings
- Location
- Curb appeal
- Market trends
A home appraisal does not include:
- Identifying issues that need repairs
- Examining problems that are not visible
Like an inspection, you can’t necessarily fail an appraisal, but the appraisal can come in lower than the buyer’s offer. When this occurs, the buyer can pay out of pocket to make up the difference between the approved loan amount and their offer, or if the buyer has an appraisal contingency, they can back out.
Comparing Home Inspections vs. Appraisals
Comparing home inspections versus appraisals can be confusing. To better understand their importance and their benefits, it is imperative to review their similarities and differences.
Differences Between Home Inspections & Appraisals
Some people believe a home inspection and appraisal are the same thing, but there are several key differences between the two including:
- Appraisals focus on a home’s value, while inspections focus on a home’s condition.
- Appraisals are typically required by lenders, while inspections aren’t required at all.
- Lenders set up appraisals, but buyers (or their agents) schedule inspections.
- Appraisals consider factors outside your home, including the community around it, but inspections only factor in your home’s physical condition.
- Appraisers will only consider what’s visible to them whereas inspectors have tools and tests that allow them to uncover issues that are hidden beneath the surface.
- An appraisal may impact your ability to get the loan amount you need, but an inspection will not.
- Inspectors and appraisers have different skill sets and are trained and certified differently.
Similarities Between Inspections & Appraisals
While we have spent a lot of time comparing home inspections versus appraisals and pointing out their differences, the two also have a lot alike including:
- They are completed by a third party.
- They include looking at both the interior and exterior of a house.
- They typically take place after the seller accepts the buyer’s offer.
- They are typically paid for by the buyer.
- Both are in place to protect the buyer and help mitigate their risk.
- They may cause roadblocks right before the closing table, but re-negotiating can make everyone feel more comfortable with the sale.
Preparing for a Home Inspection or Appraisal
Along with understanding the differences between home appraisals versus inspections, it is also imperative to know how to prepare for them.
As a buyer, you should discuss with your agent the process and the expected cost of these procedures as well as what you will do if the reports are unfavorable. When it comes to home inspectors, your real estate agent may have recommendations, but you should do your own research as well and look at reviews. While similar, we already learned that there are a lot of differences when comparing home inspections versus appraisals, so an appraisal should not replace an inspection.
As a seller, you may want to get ahead of any potential issues from these reports and focus on making home improvements before selling. This step can decrease the risk of buyers backing out or long and heated negotiations at the closing table.
At Curbio, we make updating your home before you list or completing inspection repairs easy. From basic repairs to full home remodels before selling. Because of our streamlined process, we also tend to complete projects faster than traditional contractors.
Have a property that needs a little TLC? Have your Realtor® submit a request for an estimate today or check out our home improvement app to get started. Don’t have an agent yet? Contact us and we may be able to find you one from one of our partner brokerages.
Frequently Asked Questions
What happens if the inspection uncovers problems?
If issues arise when the inspector looks at the home, the buyers and sellers have some options. One of the more common solutions is for sellers to hire a general home contractor to take care of the repairs before closing. Another option is for the buyers to address the concerns and negotiate a lower price in order to have the cash to take on these repairs either before they move in or when the repairs become necessary. In some cases, the issues are too much for the buyers to feel comfortable buying the home. As a result, they’ll pull their offer.
What happens if the appraisal is lower than the offer?
If the buyer’s offer is higher than what a property is appraised for, then the buyer’s lender is unlikely to provide the full loan amount. When this occurs, the best-case scenario is for the buyer to make up the difference between the approved loan amount and their offer out of pocket. This way, there’s no delay in getting to the closing table, and the sellers will receive the full market value of their home. Of course, a lot of buyers may not have the cash to spare since purchasing a home typically means fronting a large down payment.
The sellers’ and buyers’ agents can also re-negotiate the price and/or offer concessions to meet in the middle. This scenario would prevent delays on the sell side and help buyers get the home they want. If the buyers have an appraisal contingency for their offer, then they may also back out of the offer.
Sources:
- Zillow (2019). Home Buyers: Key Facts & Figures
- Bankrate (2023). How much does a home inspection cost
- Bankrate (2022). How much does a home appraisal cost? It depends on several factors