STEP #5: INSPECTIONS AND APPRAISALS
A home inspection is recommended in order to reveal structural and other issues with the home that you may want to address before completing your purchase transaction. In addition to being inspected, the home will undergo an appraisal by a trained professional. An appraisal is an opinion of the property’s value used primarily to protect the lender’s interest. In contrast to home inspections, appraisals are based on past sales data, the location of the home, the size of the lot, and the condition of the home.
A home inspection should not be confused with a property appraisal. An appraisal is an estimate of value that is prepared by a professional appraiser. A home inspection is an examination of a property to determine the condition of the structural and mechanical systems. This inspection should be completed by a professional home inspector.
Although home inspections are optional, it’s recommended that you include a home inspection contingency in your Offer to Purchase. By making your offer contingent on an acceptable home inspection, you have the option to withdraw the Offer to Purchase if the inspection reveals major problems that neither you nor the seller is willing to correct.
In fact, you may want to have the inspection completed before you apply for your loan. That way, you will uncover any problems with the home before you spend money or time on securing financing.
Usually, it is your responsibility as the buyer to pay for an independent home inspection. Generally, a professional home inspection only takes two to three hours, and it gives you valuable information on the home’s structural condition and mechanical systems.
Finding a Qualified Home Inspector
It’s important that your home inspection be done by a qualified professional who has training and experience in a field such as engineering, architecture or construction. To find a qualified home inspector, ask your lender or Realtor for names of companies that have a good reputation.
If you are unable to find a home inspector through a reliable recommendation, you may wish to look for someone who is a member of the American Society of Home Inspectors. The ASHI standards of practice require that inspectors judge the condition of a number of structural and mechanical components of a home and give a written report to the buyer. Examples include:
- Central heating and air conditioning systems
- Interior electrical and plumbing systems
- Interior walls, ceilings, floors and stairs
- Visible insulation
- Ventilation systems
- Foundation, basement, attic and roof
- Exterior wall coverings, flashing and trim, gutters and downspouts
- Windows and doors
- Surface grading and drainage
You should insist that each of these items be covered in a detailed report that you get to keep. It is highly recommended that you go with the home inspector when he or she conducts the inspection. This will give you the chance to ask questions about any of the conditions that may exist in the home and get an estimate of the cost for repairing these items. It will also give you the chance to ask questions about home maintenance.
What is a Home Appraisal Based on?
A home appraisal is an unbiased estimate of the true (or fair market) value of what a home is worth. All lenders order an appraisal during the mortgage loan process so that there is an objective way to assess the home’s market value and ensure that the amount of money requested by the borrower is appropriate.
A property appraisal is an estimate of a property’s value. Property value is based on such factors as location, amenities, structural condition and recent sales of similar local properties.
A home appraiser conducts the process. The appraiser will do a walk-through of the property, noting anything that can alter the home’s value. For example, if the house has a swimming pool but swimming pools aren’t popular in the area, it might not add much value to the property—the pool might even detract from it.
The appraiser will sketch and take photos of the property layout and will look for any safety code violations. If there are any, you may need to fix them before the lender approves the loan.
When you apply for a mortgage, your lender typically requires the property to be appraised by one of their approved appraisers. This practice helps create more consistent appraisals and gives you assurance that the appraiser is properly licensed and certified. Even though the home appraisal is the lender’s requirement, it’s the borrower’s responsibility. You usually pay for it as part of the mortgage costs at the time of closing. The cost is typically around $300 but can be more depending on the price of the property.
There are two primary appraisal methods for residential property. In the sales comparison approach, the appraiser compares the property with three or four similar homes that have sold in the area, often called comparables, or comps. The analysis considers specific components, such as lot size, square footage of finished and unfinished space, style and age of house, as well as other features such as garages and fireplaces.
Who Performs Home Appraisals?
Appraisers are third-party certified or licensed contractors, and the lender usually hires them. They are knowledgeable in real estate and are required to know how to evaluate a property on factors such as neighborhood growth, neighborhood housing trends and market conditions.
To be safe, make sure the appraiser is certified and deals with multiple lenders. If the appraiser only works with one other lender, he may have outside interests—and you may not receive a correct assessment.
Who Pays for Home Appraisals?
The cost of home appraisals depends on the property value, location, and size of your property. They cost a few hundred dollars and typically the buyer pays the fee at closing, although you can opt to pay it up-front. A good faith estimate—also known as a GFE—given to you by the lender will supply a fee for the appraisal.
A “drive-by appraisal” does not pay as much attention to detail as the walk-through, and most lenders will not accept this appraisal. Instead of walking through the home, the appraiser drives by the property and then researches real estate records to come up with an estimate.
These home appraisals are cheaper than traditional ones, but you should ask your lender if they will consider it before you purchase.
How Long Do Home Appraisals Take?
For most loans, a typical property assessment takes a few hours or less, and a “drive-by” assessment will take significantly less time. Turnaround time should be within seven business days, although a busy market can mean a longer wait.
The appraiser will give the final documents—called the appraisal report—to the lender, who is required to show it to the buyer. Make sure you obtain a copy for your own records.