There are two steps in the home sale process that we frequently see our clients get the jitters over: the home inspection and the home appraisal. Both processes are performed by a disinterested third party, yet homeowners tend to treat the results as a judgment of their homes.
Then, there are those who don’t understand that the home inspection and the appraisal aren’t the same.
So, let’s clear up the confusion. Knowledge is power, and the more you understand a process, the more you’ll be able to relax into it.
Appraisal vs. home inspection
The home appraisal and the home inspection are both of value to the homebuyer. The buyer’s lender will hire the appraiser and the buyer will hire the inspector.
The home inspector’s aim is to determine if there are any “major defects that will cost the buyer a lot of money above the purchase price to repair,” according to the pros at HomeFrontInspection.com.
The inspector will only “inspect readily accessible, visually observable, installed systems and components.” In other words, he or she will not be able to ascertain what is happening behind the home’s drywall or under the floorboards.
The home appraisal, on the other hand, is a process that lenders insist on before loaning the buyer the money to purchase the home.
The appraiser is an unbiased third party who will determine the home’s value on the current market.
While this person is hired by the lender, “the Appraisal Independence Requirements, or AIR, prohibits a lender’s loan production staff from having direct contact with—or influence upon—any appraisers,” according to Kristin Demshki at PennyMacUSA.com.
The buyer typically pays for the services of both professionals and owns the home inspection report. The lender owns the appraisal but is required to supply a copy upon written request.
Other common misunderstandings about the home appraisal
As mentioned previously, the biggest misconception about home appraisals is that they accomplish the same thing as the home inspection. But, that’s not all that confuses real estate consumers.
Myth: The market value of my home is the same as the tax assessor’s value
Reality: As you know, your property taxes are based on the assessor’s value estimation. value. Assessors use a process similar to that of a professional appraiser, using many of the same public records.
Because the assessor isn’t privy to the particulars of each home (whether the home in question has been updated, for example), his or her estimation of market value may not be the home’s true market value.
At any rate, the assessor multiplies his or her estimation of the home’s value by the county or municipality’s pre-determined “assessment rate, typically 80 to 90 percent.
Here’s an example: The assessor determines that a home is worth $300,000 and the assessment rate is 90 percent. While $300,000 is the market value, the assessed value for tax purposes is $270,000.
Myth: The appraisal is always accurate
Reality: Appraisers are people and, like all of us, they make mistakes on occasion. Most buyers and sellers are satisfied if the lender is satisfied.
Typically, the only time a buyer and seller are interested in viewing the appraisal is when the suggested value is lower than what the buyer has agreed to pay. And, for good reason: the lender won’t move forward if the home is worth less than the amount borrowed.
Again, appraisal reports can contain errors and the buyers are within their rights to request a new appraisal.
When does the appraisal happen?
While time frames vary, FHA borrowers can expect the appraisal to take place shortly after the seller has accepted the buyer’s offer.
What Happens During a Home Appraisal?
Much of the appraiser’s work involves research, back at his or her office. This typically occurs after a visit to the home.
During the visit, he or she will measure the home’s exterior and take interior and exterior photographs. This visit is also necessary to ascertain any conditions that impact the home’s value, both positively and negatively.
The research aspect of the appraiser’s job involves seeking out comparable properties that have recently sold and comparing the subject home to them. He or she will compare the following (and more):
- Age of the home
- Condition of the home
- Number of bedrooms and bathrooms
- Square footage
Again, this is a partial list, but it will give you an idea of how the appraiser comes up with a value for the home.
The most important thing for homeowners to do before the appraiser arrives is to ensure he or she has access to crawl spaces, attics, cellars and all the rooms within the home.
While some appraisers claim that the tidiness of a home isn’t considered, the condition is, and a tidy home appears better cared-for.