Caveat emptor. Let the buyer beware.
One of the world’s oldest sales maxims remains especially relevant in real estate transactions.
While a home is usually a family’s largest purchase, it’s also a complex configuration of materials, technology as well as structural and mechanical engineering.
And, even a home built with quality construction can fall into disrepair over decades or within an instant after a catastrophic weather event or other event tests or compromises its integrity.
In some cases, sellers with the best intentions may not be aware of a faulty breaker or an improperly installed vent hood.
So how can buyers — and their lenders — make sure they’re getting what they’re paying for?
Appearances can be deceiving. That’s why buyers and lenders often contract with licensed, local appraisers and inspectors to perform an in-depth examination of the home and create a snapshot of its current market value and its condition.
Why are the appraiser’s and inspector’s reports important to sellers?
While they typically report to people on the other side of the transaction, the appraisal and inspection report generated by these professionals can impact your bottom line.
Their findings can sometimes be the difference between an amicable sale with an on-time closing and contentious negotiation which results in the buyers walking away — after the house has been taken off the market.
In January 2022, the National Association of Realtors (NAR)’s Confidence Index Survey revealed the percentage of buyers waiving appraisal and inspection contract contingencies has been trending downwards in recent months.
In the December 2021 survey, 19% of buyers waived the inspection contract contingency, down from its height of 27% in July 2021. Meanwhile, 21% of buyers waived the appraisal contract contingency, also down from a peak of 29% in June 2021.
So, as a seller, there’s a pretty good chance your home will be evaluated by both an appraiser and inspector before closing.
On the surface, their visits may seem very similar. Each professional typically walks through the house and the yard with an extensive checklist, taking photos and carefully examining everything from the crown molding upstairs to potential signs of mold in the basement.
Yet, while they may literally take the same path through your property, their evaluations differ significantly.
By understanding the diverse roles these professionals play in the sales transactions, you can better prepare for their visits and bolster your chances of a smooth sale with your current contract.
In fact, to help pre-empt the possibility of a delayed or canceled closing due to repair negotiations, some sellers even commission their own appraisal or inspection reports. Then, they use the information to make small repairs, price the property, or make other marketing decisions prior to listing.
Home appraiser versus home inspector
The role of appraisers and inspectors are often misunderstood or considered interchangeable.
Some sellers and buyers might question whether they need an appraiser “versus” (or as opposed to) an inspector. In reality, it rarely comes down to choosing one professional over the other.
Depending on the details of your transaction, your house might be evaluated by neither, one, or both.
Appraisers assess the home’s value, so the lender can be confident the property is worth the price being paid. That way, if the buyers default on the loan, the lender is left with a sellable asset.
Inspectors examine the quality and condition of the homes and make the buyer aware of defects — both for the purposes of final contract negotiation and to protect the buyer from the onset of unexpected expenses after the sale.
To be sure, there is some overlap. For example, if a damaged roof has leaked rainwater into the home and caused mold in the attic, it affects both the home’s value and condition. Because repairs or replacement costs thousands of dollars, that roof would be flagged on both the appraisal and the inspection report.
However, the appraisal might note the home’s increased value because of a newly renovated kitchen with quartz countertops, or its proximity to the beach. Those details won’t appear in an inspection report, but a faulty light switch in the shower is destined to make the list.
What is a real estate appraiser?
Before properties can be financed, their value and condition are typically examined by an independent appraiser contracted by the buyer’s mortgage company. Each lender has its own formula for determining value and evaluating the home’s condition.
All states require appraisers to be licensed and certified to provide appraisals for federally certified lenders.
In addition, the Appraisal Institute offers advanced credentialing such as MAI, SRPA, SRA, AI-GRS, and AI-RRS designations in residential real estate.
According to Appraisal Institute President Pledger M. “Jody” Bishop, III, MAI, SRA, AI-GRS, these licensed professionals typically evaluate 250 homes a year.
Contrary to popular belief, those appraisers’ job is not to “protect” the lender. Their goal is to “provide an independent opinion of value” for that particular property.
To make sure the appraisal is impartial and in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, many lenders contract with Appraisal Management Companies (AMC) to assign properties to their network of independent appraisers.
If an appraisal report demonstrates your property meets the lender’s criteria for safety, security, and soundness, and the value of the home to be above or near the asking price and — or if the home has been the subject of a bidder war and the buyer is willing to pay for the difference between the appraised value and the asking price — the loan is more likely to be approved.
If your home doesn’t meet the lender’s criteria, you risk the appraisal coming in below market value and the property’s eligibility for certain loans.
If the appraiser flags significant repairs that must be made for the property to be eligible for a loan program, it opens the door for potential closing delays and the opportunity for the buyers to renegotiate or even void the contract.
When does a home appraisal take place?
Even before the house goes on the market, some sellers pay for a pre-listing appraisal to gather information to help in pricing.
However, in most cases, “Everything happens upon the terms of the contract,” Bishop explains. “So if the contract is contingent on financing, the loan is going to trigger the appraisal process.”
Generally, many lenders wait until they receive the appraisal fee from the buyer before they order the appraisal.
What happens during a home appraisal visit?
Before appraisers conduct a home visit, they conduct extensive research using online databases and public records into the specifications of the property and comparable properties nearby.
“An appraiser uses the facts to figure out what the individual property is worth by comparing each sale to that property and then recognizing and accounting for differences,” Bishop explains.
To objectively establish the difference between one sale price and another, he says, “we look for differences in characteristics such as location, age, condition, quality, lot amenities (i.e., pool, deck, outdoor kitchen or golf course views) or interiors (i.e., molding, coffered ceiling, wine cellar, etc.).”
During a home visit, an appraiser works through a checklist and ranks items as good, average, outstanding, or exceptional. Some indicators of the home’s value include:
A home’s structure, condition, and size
- Square footage
- The number of bedrooms and bathrooms
- Foundation type
- The type of materials used
- The presence of a basement, crawl space, or attic
- Cosmetic updates and desirability of wall and floor finishes
- Evidence of deferred maintenance, physical deficiencies, or adverse conditions
A home’s external characteristics
- Neighborhood setting (urban, suburban, or rural)
- Zoning classification
- Lot size
- The driveway surface and car storage
Additions and updates
- Energy-efficient features
- Fireplaces or wood stoves
- A patio or deck
- A porch
- Layout and design
- Garage finished or not
- Structure system: brick piers, joists, wood frame, etc.
- Windows: double-hung wood, double, vinyl, thermal, windows power, windows
- Ceiling height
- Attic Insulation
- Standing water in basements, foundations, or other places on the property
- Safety Issues as designated by the lender/loan program
External influences affecting value
- Financing terms
- Conditions of sale
- Market conditions
While appraisers need to walk through your home unencumbered to do their work efficiently, there are some actions you can take to make sure the appraisal goes well.
You can begin by downloading Homelight’s free printable guide for an appraiser’s visit.
What are the benefits of an appraisal?
From the seller’s perspective, a favorable appraisal report before closing often affirms the buyer and their lender’s faith in the soundness of their investment and increases the certainty of an on-time sale at the agreed price.
However, some sellers benefit from appraisals before they even list their property.
A pre-listing appraisal might be beneficial if the property includes extra acreage, an extensive garden or orchard, stable, attached apartment, or other unusual features.
In addition, if that property might be marketed for sale by owner (FSBO), an appraisal can provide the homeowner with valuable information for pricing.
For example: Establishing an asking price for an old, waterfront property (such as a fishing camp or lake house) in an area with no recent comparable sales can be a gamble.
“It can become really difficult to figure out what a home is worth because there’s limited market data,” explains Bishop. “That’s when an agent will advise a property owner to have an appraisal done.”
Besides being a starting point for pricing, he says, “The appraisal is not public; it’s only available to an interested buyer with the commissioner’s approval.”
So, there’s no risk a pre-listing appraisal will negatively impact offers.
Is a home appraisal required?
Whether lenders require a complete appraisal with an in-home visit depends on multiple factors including the type of lender, buyer’s credit history, the amount financed, recent data (such as a prior appraisal) on the property, and the availability of appraisers in the area.
“Because of appraiser shortages, particularly in some rural markets, Bishop says lenders have created two alternatives to the full appraisal: 1) an evaluation, and 2) a waiver.”
“Depending on the degree of the lender’s risk — the amount of cash they’re laying out — lenders can implement an eval, which is done by a non-licensed appraiser (such as a trainee),” says Bishop. Those evaluations might involve data analysis of comparables and possibly a house “drive-by” to generate a “valuation opinion.”
Also, “It’s becoming a little more common to see the waivers for properties valued under $1 million,” says Bishop.
For example: A couple with good credit wants to buy a $1 million home and finance $100,000. The lender has enough information from their automated valuation model (AVM) and assessor’s values to be satisfied that there’s enough equity. So, the lender might just waive the appraisal.
“As I understand it, 50% of the properties have some sort of AVM, eval or waiver through Fannie and Freddie Mac,” Bishop says, “FHA and VA still do full appraisals; but, they want to get into something less than complete appraisals.”
COVID and the increased number of comps available with the booming market prompted Fannie and Freddie to begin accepting hybrid appraisals. Bishop says these “dash comps” can be completed from an appraiser’s desk.
Furthermore, small community banks and credit unions come under a different set of regulations than the governmental lenders and large commercial mortgage companies such as Wells Fargo or Bank of America.
“Those small community banks and credit unions can process loans under waivers and limited appraisals all day long,” he explains. Jumbo loans from all types of lenders may have different requirements as well.
Who pays for the appraisal?
Although the lender may make arrangements for an appraisal through the AMC, it’s typically the responsibility of the buyer to pay the appraisal fees to the lender.
What is a real estate inspector?
An inspector’s training, credentials, areas of expertise, and role in the sales transaction are completely different from an appraiser’s.
While the appraiser is contracted by the lender to determine the home’s worth, “Inspectors don’t even ask what the property value is,” begins Nick Gromicko, founder of InterNACHI®, the International Association of Certified Home Inspectors. “We are hired by the buyer to look for defects — what’s wrong with the house, its systems and components.”
As a trade association for home inspectors, InterNACHI® offers education, training, benefits, and support to its members.
With each inspector performing approximately 250 inspections annually, the organization’s 30,000 members completed an estimated 5.2 million inspections in 2021.
Before becoming licensed, many home inspectors work in plumbing, electrical, construction, or other trades. Besides meeting the licensing requirements in 34 states, some professionals become certified master inspectors, who have done 1,000 inspections.
Besides providing a general home evaluation, home inspectors can complete additional specialty inspections to assess environmental hazards including radon, well water problems, septic tank, mold, and termite infestation.
When does a home inspection take place?
“It’s the first call buyers make after the seller accepts the offer,” says Gromicko, “because they often have a roughly 10-day window to get the inspection done, ask for repairs or closing credits, or walk away from the deal.”
What happens during a home inspection visit?
Usually, it takes home inspectors approximately two to two-and-a-half hours to evaluate all the structures and systems on their checklist.
During onsite visits, home inspectors look for evidence of:
- Water damage
- Structural and foundation issues
- Old/damaged roof
- Damaged electrical system
- Plumbing problems
- Insect and pest infestation
- Issues with the HVAC system
- Garage door operation malfunction
- Step, stairway, and railing safety
- Fireplace operation safety
- Dangerous conditions in the yard and hardscape
- Wood, siding, or other materials for rot and decay
- Damaged seals on windows or plumbing fixtures
Once back at the office, it typically takes an inspector about an hour to generate a report.
“Our detailed reports are often 30 pages long — sometimes 50 or 60 pages — with information and photographs,” says Gromicko. “You can imagine a 20-year-old home can have a lot of defects.”
To help you ace your home inspection, Homelight offers this updated checklist and a video on what to expect during an inspector’s visit.
What are the benefits of a home inspection?
When a home is under contract, the home inspection can flag issues that need to be resolved before the sale can proceed. While the process can be fraught with stress because the need for additional negotiation looms in the background, the home inspection can also increase the level of trust between buyer and seller.
Is a home inspection required?
While mortgage lenders are likely to require an appraisal, they generally do not require an inspection.
Nonetheless, many buyers find their investment in a home inspection is money well spent. Gromicko estimates that 94% of homes sold today receive an inspection.
Who pays for the home inspection?
The buyer chooses the inspector and pays for the inspection.
Why would a home seller consider a pre-listing inspection?
In some markets, there has been a trend toward sellers paying for pre-listing home inspections.
According to Gromicko, some of the advantages of a pre-listing inspection include:
- Having the information to craft a more accurate description of the home’s condition in marketing materials, so sellers and their agents don’t waste time showing the home to people who aren’t interested in a property in the current condition.
- Avoiding eleventh-hour negotiations at closing after an inspection reveals a problem and the house has been off the market.
- Having the confidence to price the property right the first time and fend off any lowball offers with the knowledge of the home’s condition.
For all the benefits a pre-listing inspection can provide, there are two very important caveats:
- According to state disclosure requirements, any problem or defect discovered during a pre-listing inspection must be disclosed to potential buyers. For this reason, some agents discourage pre-listing inspections.
- Even if the seller provides a pre-listing inspection, the buyers have a right to have the property evaluated by an inspector of their choosing and negotiate with the seller based on that report.
By connecting with a top agent through HomeLight’s free Agent Match, you can consult with an experienced agent in your area to determine whether a pre-listing appraisal or inspection is right for you.
What do home appraisers and inspectors have in common?
While the roles of appraisers and inspectors are different, there are some commonalities:
- Both should be impartial third-party professionals.
- Both are licensed and must have specialized training.
- Both home visits typically occur during the escrow period.
- Results from both can be used in buyer/seller negotiations.
- Both are typically paid for by the buyer.
- Both evaluate the safety, soundness, and security of the house including the home’s structure and mechanical systems.
Do I need an appraisal or inspection when an all-cash offer is involved?
Some cash buyers may request an inspection and appraisal.
If you’re interested in investigating the possibility of selling your home quickly without contingencies based on condition, you may want to consider getting an estimate from HomeLight’s Simple Sale platform. Tell us a bit of information and we’ll provide you with a no-obligation cash offer in as few as 48 hours. It’s quick, easy, and can reduce the stress of a home sale.
This sales option allows you to skip open houses, showings, and negotiations regarding repairs. Simple Sale maximizes the value of your home with a quick sale and all-cash offer, and without additional fees, commission, or upfront costs.
The appraiser and inspector both play an important role in your home sale
Some sellers engage the services of appraisers and inspectors to provide insights to price and market their homes before listing.
However, most sellers don’t meet these licensed professionals until they arrive on the seller’s doorstep to evaluate the home’s value for the buyer’s lender and the home’s condition by the buyer.
By preparing for an appraiser’s and inspector’s visit, you have an opportunity to showcase your home’s most valuable features, document repairs, and other improvements, foster the buyer and lender’s trust, and — most importantly — move toward an on-time closing at an agreed-upon price.
While some sellers opt to go through negotiations alone, a top agent is an invaluable ally in helping homeowners navigate the nuances of a home inspection, appraisal, pricing, marketing, and so much more.
If you’d like to explore the value a proven agent can add to your sale, try HomeLight’s Agent Match tool. In just two minutes, you can be matched with some of the best real estate agents, who will contact you and guide you through the process.
Header Image Source: (Semenkov Sergey / Unsplash)
- "December 2021 REALTORS® Confidence Index Survey: Fewer Buyers Waiving Appraisal, Inspection Contract Contingencies," National Association of Realtors® (January 2022)
- "What Consumers Need to Know About Real Estate Appraisals and Appraisers," Appraisal Institute® (October 2021)
- "H.R.4173 - Dodd-Frank Wall Street Reform and Consumer Protection Act," Congress.Gov (July 2010)
- "NAR Issue Brief Appraisal Management Company Q&A," National Association of Realtors® (2013)