Inspection or Appraisal –
These two terms may be a bit confusing so we thought we’d explain these different events. Both are very important in a real estate transaction, but serve different purposes.
An inspection is performed by a private home inspection company hired by the buyer. The purpose is to investigate the home and it’s systems to find if there are any repair issues. As the buyer, you do not want to buy a house and then find out that you need a new furnace, for example. An inspection may uncover both large or small issues, but does not guarantee that everything will be found. The idea is to be informed as much as possible so that you’re less likely to have a nasty surprise after you move in. A good inspector (we recommend using a licensed company) will evaluate all the major components of the home: roof, attic, crawlspace, foundation, windows, etc. They will take photos and prepare a detailed report. If they see something that is beyond their expertise, they will make a note calling for a specialist to evaluate (such as well testing). The cost of an inspection is about $400-500.
What are the possible results of an inspection? A good real estate agent will make sure that the buyer has an inspection contingency as part of the purchase contract. With that in place, if something major comes up in the inspection the buyer can either ask the owner for compensation or to make the necessary repairs. If the seller won’t agree, then the buyer can cancel the contract and still walk away with their earnest money intact.
An appraisal is performed by an appraiser that is hired by the bank in order to independently establish the market value of the home. The bank wants to ensure that the amount of money they are lending the buyer is not more than the value of the home. The buyer pays the appraisal fee as part of their closing costs. The appraiser will look at the house and compare it to other recently sold homes in the area to establish market value. If the appraised value of the home is less than the agreed upon sale price, the buyer has several options: ask the seller to agree to reduce the sale price, pay the difference between the sale price and the appraised value, or cancel the contract based on the financing contingency. The last option is to order a new appraisal in hopes of the appraised value coming in at the sale price.
So, while both activities may seem similar they serve different purposes. Both are essential to a successful closing and a good real estate agent will work hard to facilitate both processes.