Home inspection vs appraisal

Silicon Valley home buyers are sometimes confused about the difference between a home inspection vs appraisal.  Are they one and the same? Not even close! The people who perform these important jobs for all of us have different backgrounds, skills, and expertise.

Home inspection vs appraisal – basics

magnifierA property or home inspection is done to determine if the major components of a house, townhouse, condo, etc. are all working and in satisfactory condition, and to point out defects and problems so that they may be addressed by the current or future owner.  Many home inspectors will also lay out how to prevent future problems by addressing things like drainage or what sort of annual maintenance may be advisable.

Often, the home or property inspector is or was a licensed general contractor. This is a person with a good working knowledge of the basic systems of the house. They are not specialists in particular features (think pool, foundation, HVAC). For those specific elements, you’d hire that specialist.  Also, in California, home inspectors are not licensed by the state because the state does not want them to perform repairs. (This is not the case with the special inspectors.)

The property inspector will make a visual inspection of things like

  • the foundation (is it cracked, is it bolted?)
  • any issues in the crawlspace (moisture, ponding water, cellulose debris)
  • the attic (is there evidence of vermin? are electrical junctions all in boxes? is there enough insulation?)
  • as well as the furnace, water heater, etc.
  • if the water flow is good in the home and at the water main.

These are all things that the appraiser does not do. (There are other possible inspections, too, besides just the home inspection, such as chimney, roof, HVAC, pool, foundation, etc.)

Home inspector vs appraiser - an appraiser will create a floor plan of the home. A property inspector does not do this. Image of a typical ranch style home in Cambrian.An appraisal is a formal statement of value by a licensed appraiser.

The appraiser measures the size of the home to establish the square footage.

The appraiser does not check to see if the furnace works! I did once witness an appraiser turn on the hot water to make sure that gas is on for the property, though – but just once did I see that happen.

However, if the roof is very old, if the home needs substantial remodeling, that will impact the assigned value.  The appraisal is used by the lender to determine how much the bank should be lending on.  Often, that’s the same amount as the purchase price.  But sometimes not!

Some lenders will add substantial value for an expensive backyard remodel. I’ve seen others add very little – surprisingly.


Home inspection vs appraisal – low appraisal for superior home

No one likes to see a low appraisal value when a property is being purchased. If a home has superior upgrades, particularly if they are not obvious or visible, it’s helpful to provide a list of upgrades to the appraiser. Sometimes agents know of mitigating factors on other sales, and that info can be useful to most appraisers, too.

What happens if the appraisal is lower than the purchase price of a home?

A buyer with 20% down payment is in contract to purchase a Cambrian house for $1,400,000.   The expectation is that the bank will fund a loan for 80% of purchase price, or $1,120,000.  If the appraiser finds the value to be only $1,350,000, the loan will be 80% of that number – not the purchase price. In that case, the mortgage would be at $1,080,000. Note: most people think that the buyer will be “making up” the full $50,000 shortfall, but that’s not the case.  The amount to make up is $40,000, not $50,000 because it’s the percentage of the gap, not the whole thing.

If you happen to be buying residential real estate “all cash”, you will not be required to have or pay for an appraisal.  You are also never required to have inspections, but unless a seller is providing excellent pre-sale inspections, it would be a huge and possibly costly mistake to skip having them.

Related reading to home inspector vs appraiser:

Home buying: home inspection (on the popehandy.com site)
Home selling: pre-sale home inspections (also on popehandy.com)