Real Estate Appraisal vs. Home Inspection: What is the Difference?

Posted by Team - 14 March, 2018


real estate appraisal vs. home inspection

As someone involved in a real estate transaction, you might come across two types of services prior to the sale of a home: real estate appraisal and home inspection. Although an appraiser and a home inspector may appear to be looking at the same areas of a property, they are evaluating it for several reasons. Knowing the differences between an appraisal and an inspection is important, as they each complete very separate tasks. Learn the main differences between these two processes and when you might need one, the other, or both as a buyer.

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The Real Estate Appraisal Process

A real estate appraisal is a third-party report on the monetary value of the property based on the elements of the home and the fair market. Appraisals are necessary to make sure all parties involved in a real estate transaction receive an accurate and fair value for the property. In most cases, a financial lender will assign a real estate appraiser to a case to ensure he or she is an unbiased third party. The Appraisal Independence Requirements (AIR) do not allow a lender’s loan production staff to contact or influence appraisers.

An appraiser will check the condition of the home and its major systems – like the job of a home inspector but less complete. The appraiser, however, will also use comparable sales and the prices of comparable homes in the neighborhood to come up with an accurate value for the real estate. An appraiser will end by giving all three parties involved (the buyer, seller, and lender) a detailed report on the final calculated value of the home, and how the appraiser came up with this amount. The final report will include comparable sales, statistics on current real estate market trends, and other information that went into calculating value.

An appraiser will visit a home in person to gather information such as the property’s square footage, number of bedrooms and bathrooms, any property damage, and the shape of major systems and structures and to compare it to real property records. The appraiser will then evaluate comparable homes on the market before offering a final report of value. In most home sales, the buyer is the party responsible for paying for an appraisal. An appraisal protects a buyer by offering crucial information to guide the buyer through a property’s positive and negative features.

The Home Inspection Process

A home inspection also involves a physical evaluation of a piece of real estate. A home inspector will visit a property and examine its integrity, condition, and functionality. The purpose of an inspection is to help prospective buyers know what they’re getting into before making a purchase. In most cases, it is the buyer’s responsibility to pay for a home inspection before purchasing a property. It is typically in a buyer’s best interests to schedule an inspection before making a buying decision, in case the seller is concealing information about a home’s integrity. Areas of interest to an inspector typically include a home’s:

  • Roof
  • Foundation
  • Plumbing
  • Site drainage
  • HVAC systems
  • Electrical
  • Chimneys
  • Decks and patios
  • Built-in appliances
  • Floors and ceilings

If the inspector discovers any building or component defects, he or she will describe the findings in a report to the prospective buyer. The buyer can then review the inspection report and decide whether to continue with the transaction, decide not to purchase the home, or ask the seller to make repairs prior to purchase. The two parties might set up a separate escrow account to fund repairs if this is the case. Home inspections allow buyers to avoid expensive surprises and “money pits” when purchasing real estate.

Appraisal vs. Inspection: Similarities and Differences

There is little difference between appraisals vs. inspections. They both involve a professional visiting a property and conducting physical exams. They both occur prior to the sale of a home, and they both end in detailed reports regarding the property’s state, functionality, and integrity. Both processes benefit the buyer more than the seller and both are meant to be unbiased looks at the piece of real estate. The potential buyer of a property will pay for both an inspection and an appraisal, although a lender might arrange the appraisal process.

The main difference between appraisal vs. inspection is that an appraisal deals with the value of real estate, while an inspection deals with the condition of the home. The main purpose of a real estate appraisal is to determine the market value of the home, while the purpose of an inspection is to help a buyer assess the risks of an investment. While the home inspection process ends once the inspector examines the details of the home itself, an inspection is only the first part of an appraisal. An appraiser will go on to look at comparable properties to value the home, as well as factors such as nearby school zones, crime rates, lot size, and boundary surveys.

A home inspection is much more thorough than an appraisal, lasting two to three hours compared to the average appraisal’s simple walk through. An appraiser aims to formulate an unbiased, accurate opinion of the value of a property for a lender, while an inspector informs the buyer about the current condition of the home. In most cases, a home inspection happens before the buyer’s purchasing decision, while a real estate appraisal happens after a buyer already purchases a property. If the appraiser’s value is less than what the buyer paid for the home, the seller might reduce the purchase price, or the buyer could make a larger down payment.

Do You Need One or Both Real Estate Services?

As a buyer, you might notice that most real estate checklists include both home inspections and real estate appraisals. This is because both processes are important in protecting a real estate investment. Hiring an inspector prior to purchasing the home can safeguard you from making a costly mistake, such as buying a home without realizing it has a faulty foundation or outdated electrical systems. Hiring an appraiser is also important, as it gives you an unbiased, truly accurate value of the property. By paying for both processes, you don’t have to trust the seller’s word on the state of the house, which could be biased, inaccurate, or incomplete.

Do not trust one party to act as both your appraiser and your inspector. Real estate appraisal vs. inspection are two very different processes that require separate skill sets and expertise. You cannot use a home inspection report as a means of calculating a home’s value, for example. This is incomplete and useless information without other price factors, such as comparable sales and the desirability of the neighborhood. At the same time, a high appraisal value of a home does not guarantee that it’s in good shape. An appraiser’s less in-depth exam of a home could miss crucial details such as broken appliances or mold growth in the basement.

Home inspections are generally voluntary for buyers, while appraisals might be mandatory if a buyer works with a mortgage lender or home loan company. Most lenders require property appraisals to ensure that the buyer is getting an appropriate price. Despite being voluntarily, however, home inspections are incredibly important parts of the buying process if a buyer wants a safe investment. If you’re in the market for a new home, pay for both an inspection and an appraisal for total peace of mind before you buy.

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Topics: Real Estate

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