Appraisal vs. Inspection: What' the Difference?
Yet there are still other questions that need to be answered after your offer is accepted: Do I need an appraisal? Do I need an inspection? Or will either work just fine? The fact is, while both report significant facts about the property, they both have completely different objectives.
An appraisal is a report that helps to determine the current market value of the property being purchased. A licensed appraiser will receive a copy of the executed sales contract then proceed to prepare the appraisal report.
The appraisal is ordered and required by the mortgage company to assist in determining current value. Regardless of the sales price of the home, a lender will place a loan based upon the lower of the sales price or appraised value.
An inspection carefully evaluates the property from the basement to the ceiling to determine the property’s current condition without regard to value.
An appraisal report is compiled primarily by comparing similar homes in the area that have recently sold. These sales, called “comps,” must have occurred within the previous 12 months with at least one sale recorded in the previous six months. The appraiser will also list recent listings in the area, or homes that are for sale but not yet sold.
Why does a lender require a report showing recent sales? Marketability. A lender places a loan based upon, partly, the current value of the property. Value is a result of buyer demand. Lenders like to know that if push comes to shove and they have to foreclose on the property, the property can soon be sold in the surrounding market.
For example, if the property purchased is a geodesic dome and there are no other geodesic domes in the neighborhood, there are no comps. A lender will not place a loan on such an out-of-place property. Likewise, an appraisal report must compare the subject property with similar properties in the area. A condominium can’t be used as a comp for a single family home. Neither a duplex. If the subject property is a single family residence, the comparable sales used must also be single family homes.
A home inspection doesn’t address value but the condition of the home. An inspector will complete an on-site review of the property making notes such as the condition of the roof, the heating and air conditioning system and electrical wiring. If the roof needs repair or the air conditioning system doesn’t work, you want to know about that, right? Of course, when inspected items are in such disrepair it can make you reconsider your offer.
An inspector will also look at less critical functions. Does the garbage disposal work? How about the light switches throughout the house? Does the trash compactor compact trash? While such less important items aren’t as “mission critical” as a bad roof, they may alter your offer on the home.
A home inspection can also include a pest inspection report, identifying current or previous infestation of wood destroying insects such as termites or carpenter ants. In some parts of the country, a lender will require a pest inspection report just as they require an appraisal.
Both an appraisal and an inspection are important reports that all buyers should have. But unless the property is in an area of the country where a termite report is required, lenders don’t review a property inspection; it’s not a requirement for obtaining the loan---it’s a requirement for your peace of mind.