I am often asked this question by both buyers and sellers. Buyers wonder why they are paying for two different reports that they think are the same thing. Sellers question why an appraiser didn’t find a deficiency in a home that the home inspector did. The best way to start this discussion is to define the purpose of each document and for whom it is being prepared
An appraisal is used to estimate market value and is usually ordered by a lender to confirm that the price that a buyer is paying for the home is actually worth it. The appraiser uses guidelines established by the lending and appraisal industries to estimate this value by looking for recently sold properties in the general geographic region and researching what they sold for. Appraisers generally look for properties that are the same style, size, and contain similar amenities.
When the home buyer applies for a loan, they typically pay an application fee to the lender. The application fee varies from lender to lender but is usually a couple hundred dollars. A portion of the application fee is then used by the lender to order the appraisal.
When appraisers inspect the home, they are looking for obvious defects like active leaks, dilapidated roof, and basic safety issues. Some loan types (FHA) have a more stringent set of requirements on what they look for, but these inspections are cursory at best. Usually an appraiser only spends 15-30 minutes in a home and they are not trained home inspectors, so they only pick up on the most obvious items.
Home buyers need to remember that an appraisal is designed to protect the lender, NOT the home buyer. It ensures that the sale price is in line with overall market values and makes sure that the lender is confident in the real estate that they are loaning on. You should not rely on a lender’s appraisal to give you confidence in the condition of the home.
The Home Inspection
Although a home inspection is highly recommended, it is not required in most real estate transactions. Home inspectors are hired directly by the home buyer and focus on the major components of the home. They assess the overall condition of the home and pay close attention to mechanical systems such as plumbing, electrical, HVAC (Heating-Ventilation- Air Conditioning) system, as well as major appliances. They also look at the structural integrity of the home and will focus their attention on the foundation, roof, chimney, deck, and windows/doors.
During the 3-4 hours that the home is being inspected, the home inspector will make a determination as to whether the home is in need of further repairs or draw the buyer’s attention to potential health and safety concerns. Keep in mind that home inspectors are not HVAC contractors, electricians, structural engineers, or roofers. If the home inspector observes a potential deficiency in any of these areas, they may advise that the buyer seek additional input from a specific professional tradesman.
Buyers should expect to pay a couple hundred dollars at the time of inspection and will receive a comprehensive written report of the inspector’s findings along with pictures of various components of the house. After receiving the report, the buyer should take time to read it. If they have questions, they should contact the home inspector for clarification. Be aware, however, that an inspection is not a home warranty and there’s no guarantee the inspector will find all problems with a property.
During my years in the real estate business, I have never seen a perfect home inspection report. Virtually all homes have some sort of deficiency. Does this mean that the buyer will be stuck with a home that they now know has issues? No. Most real estate contracts allow the buyer a specified time after the agreement has been signed to renegotiate the terms of the agreement if there are issues that are identified in the home inspection report.