New home buyers frequently confuse the home inspection and appraisal. Both are important steps in buying a home, but a home inspection and appraisal are two very different things. An appraisal is designed to protect the interests of the lender, while a home inspection protects the buyer from buying a maintenance headache.
When you buy a home using a mortgage, your bank is going to require an appraisal. The appraisal is ordered by the bank, but paid for by the borrower. It’s primary purpose is to protect the bank by ensuring the home is “as-described” and that the purchase price of the home is in line with market values in the area.
Lenders, borrowers and their real estate agents have no influence on the selection of an appraiser. New laws require that it is ordered from a third-party appraisal management company who assigns an appraiser to inspect the home. The appraiser will visit the home in person, take measurements to estimate its size and take numerous photos of the home. The appraiser will also visit nearby homes that are recently sold or actively listed for sale that he believes are similar to the home being purchased.
Appraisers will do a short inspection of the home, 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 appraisers 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.
Once the appraiser has visited the home, they will submit a report to the bank that includes details about the home and details about comparable sales nearby. From this information, they give their own estimate of the home’s value. If the estimate is lower than the sale price of the home, the bank will lower the amount of money that they are willing to loan on the home.
Home buyers need to remember that an appraisal is designed to protect the bank, NOT the home buyer. It ensures that the sale price is in line with overall market values and makes sure that the bank is confident in the real estate that they are loaning on. You cannot rely on a bank appraisal to give you confidence in the condition of the home.
A home inspection is performed by a home inspector at the request of the buyer. The purpose of the home inspection is to identify repair items, deferred maintenance and other potential issues with a home. In many states (like Washington), a home inspector must be licensed to perform the inspection.
A home inspection is a thorough analysis of a home that usually takes 3+ hours. The home inspector will view all areas of the home, such as the roof and crawl space. They will visually inspect major systems like electrical, plumbing, siding and windows. They will also test operation of major appliances like furnaces, stoves, etc. The inspection is not intrusive, so it is limited to what can be seen without opening up walls. A competent inspector has a variety of tools and gadgets that they use to uncover unseen problems.
Depending on the results of the initial inspection, you may actually want to hire additional specialists such as sewer inspectors, drainage experts, environmental testers, electricians or plumbers. A good real estate agent will have a bullpen of these sorts of companies that can help you complete your due diligence.
While a home inspection is technically optional, I have never recommended a home purchase without doing one. Spending a few hundred dollars to uncover thousands of dollars in upcoming repairs is money well spent.