What is the difference between an appraisal and an inspection?

Answer:  This is a great question that is frequently asked by first time buyers, and with more entering the market it is time to revisit the answer.

The first difference is one is usually required and the other is optional.

Appraisal

If you are getting a mortgage to purchase the property the chances are very high the lender will require an appraisal. (In some instances, Fannie Mae or Freddie Mac may allow a “waiver” for the appraisal, this could happen for transactions with a low loan to value. Waivers are not rare, but are not common either.) The primary purpose of the appraisal is for an uninterested, licensed, professional to ascertain the value the property used as collateral for the mortgage on the date the offer from the buyer was accepted by the seller. The secondary purpose of the appraisal report is to notify the lender if there are any noticeable defects that could impact the value and/or salability of the property or present health and safety concerns for occupants.

It needs to be noted that we, the lender, have no control in the appraisal process. Starting in 2009 with the Home Valuation Code of Conduct and strengthened in the Dodd-Frank Act, direct communication between a lender and appraiser is forbidden. The purpose of this is to allow the appraiser to independently value the property without undo influence from the lender. As a result, we order appraisals through an Appraisal Management Company (AMC). Once the order is placed, the AMC passes the order along to an appraiser, who submits the finished appraisal to the AMC, who then sends the report to us.

Many people are surprised at how little time most appraisers spend at the actual property. They spend so little time because most of the work to prepare the appraisal report is done before the appraiser goes to the property for his/her inspection.

An appraiser will receive a copy of the purchase contract and any counter-offers for the transaction at the time the order is made. Before heading out to the property the appraiser, using the Multiple Listing Service and public records, will research the area looking for comparable properties. A comparable property is one that is similar to the subject property in type of dwelling, size, number of bedrooms and bathrooms and other amenities that impact value such as a pool. The appraiser will look at recent sales to determine prices for the closed sales, how long the properties were on the market, and the condition of the properties at time of sale. Properties that have been recently sold but have not yet closed escrow (called “pending sales”) will also be noted to determine if there is current activity for comparable properties to the subject. Finally, the appraiser will look at active listings on the market to determine what other options did the buyers have at the time they purchased the subject property and at what price and condition.

Once the appraiser knows the terms of the transaction and has an idea of the comparable properties in close proximity, s/he will inspect the subject property. The appraiser will measure the property’s interior room by room to make a sketch showing the overall size of the property and rooms. While measuring the appraiser will visually inspect the property to ascertain the overall condition, and not any noticeable issues that may impact value or the health and safety of inhabitants. Any noticeable water stains in the ceilings will be noted as they indicate a leak in the roof at some point, if there are missing window panes, flooring that is missing or has holes, missing sinks or toilets, anything that deters from the property being fully habitable or that could be evidence of a bigger issue is photographed and noted. In California the appraiser will also photograph and take note that the property meets state law by having smoke and carbon monoxide detectors properly installed and that the water heater has earthquake straps and is on a stand or platform so it is off the ground.

The appraiser will not test the plumbing or electrical systems, test windows for their ability to open, or otherwise perform a very close and detailed inspection.

The appraiser will drive by the comparable properties that are being used to establish value and take photos for them from the street.

After all the data is collected the appraiser will prepare the report. The report will compare the comparable properties and make adjustments to the sales price of those properties for size, condition of property, amenities, location (such as on a busy street), etc to arrive at an opinion of value.

Inspection

When you and the seller agree to a sales price one of the clauses you will likely agree upon is the opportunity for you, at your cost, to engage a professional to inspect the property, what the industry calls a “home inspection.” You may choose whomever you desire to perform the inspection, it is recommended that you choose someone certified by the California Real Estate Inspection Association (CREIA). In California there is not state licensing or regulations for real estate inspectors, CREIA a professional organization that has requirements for its members that include continuing education and following codes of ethics.

It is important to note that the inspector works for you. Not the seller or the real estate agents, but for you. The objective of the inspector is to perform as thorough and examination of the subject property as possible, the result of which will be a very detailed report.

The inspector will grade everything examined from needs replacing to estimated longevity to in fair-good-excellent condition. It is not the inspectors concern if the report “blows the sale” or “makes the sale” but to provide an objective, honest report of the property’s condition.

A thorough inspection will include inspecting the roof, and if possible, the attic and/or crawl space below the roof. If on a raised foundation, crawling under the property. Inspecting the electrical panel and testing outlets and switches. Testing the plumbing by flushing toilets and turning on taps to gauge water pressure. Appliances that use gas will be tested to determine if they are functioning properly with appropriate hook-ups and safety features. These are the major areas of concern and cost to repair or replace, but all aspects of the property will be inspected and put into the report for the buyer.

Not included in the report will be the cost to correct any defects noted, and it is not ethical for an inspector to quote, bid on or complete any repairs noted as needed on the report.

Once completed the report will provide the buyer with a very good indication as to the condition of the property. It should be noted that there is not “perfect” home in regard to condition; even brand-new homes can have faults and issues that need to be corrected. The important issues to consider on a home inspection report are the major, “big ticket” items that may need to be replaced or repaired in a short period of time. If there are any such items listed, say the electrical needs to be updated, it is encouraged for the buyer to obtain a bid from a licensed contractor for the cost to correct, and then make a decision how to move forward.

It is highly recommended that you accompany the inspector when s/he visits the property for the inspection. Note that this inspection is much more thorough, and therefore time consuming, than the visit from the appraiser, in some cases a few hours. By attending the inspection, you can learn a lot about your new home, where is the gas shut off valve, education on the electrical panel, where are the clear-outs for plumbing, and most importantly get a verbal report and detail form the inspector that will shed more light on the condition than just reading a formatted report.

The primary difference between an appraisal and an inspection is their purpose. While the appraiser will note some condition items the primary purpose is to let the lender know if the sales price is supported by the market in the area, the purpose of the inspection is to inform the buyer of the condition of the property and its components. Both are very important because of their purpose.

A few years ago after this was the question of the week, witty-agent Cathy in the Central Coast emailed me, “the biggest difference is if you get a stupid appraiser it’s not your fault, if you get a stupid inspector it is.”

Have a question? Ask me!

A lot of economic data to unpack. This week saw very positive economic data for the American economy. In March the economy saw:

  • 1st quarter Gross Domestic Product jump 6.49%
  • 1.5 million jobs added
  • Personal income, on the back of $1400 stimulus checks, increase 21%
  • Consumer spending jump 4.2%
  • Personal saving rate increase to 27.5%
  • Inflation climb to 2.3% annualized

In normal times this amount of extremely strong economic news push rates up very quickly. It was all tempered however by the Federal Reserve announcing it will continue the current course of low rates and purchasing hundreds of billions of U.S. Treasury debt and mortgages for the foreseeable future.

Rates for Friday April 30, 2021:  Counter intuitive to historical economic principles, rates, which started to lean lower at the end of next week, did dip down this Friday. I’m lost. With the trillions of dollars coming from Washington, and promises for trillions more, an economy that can be described as booming growth, with more booming to come, rates should be pushing higher and higher. Take advantage before they do.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%   Down 0.125%

30 year high-balance conforming                   2.875%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

It’s here! Friday April 30th! Two weeks ago our youngest booked a flight on her own for the first time and it was to fly from JFK in New York City to LAX in SoCal. She’s coming home for the summer after her first semester at college.

Leslie and I have been pampering our dog Sammy, talking to him and getting extra pats, since January as both the girls are gone. He may pout for a while with a lot of attention shifting to our daughter, but she should make up for with a third person here to spoil him.

Looking forward to this evening when I get to give and get a very big, long hug at the airport!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog