How Home Inspections and Appraisals Work

Photo illustration to accompany article on home inspections and appraisals Clint Branch and Shutterstock

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Home inspections and appraisals are key steps in the home-buying process. 

Both give you a better understanding of a home’s condition and value before you follow through with what likely will be one of the biggest investments in your life. 

Home inspections and appraisals look at two different aspects of a property, with both giving prospective buyers a clearer picture of a home than is typically evident from a listing or even walk-through. “There’s an inherent built-in benefit to both. The appraisal will probably be required, the inspection not so much, but you’d be doing yourself a disservice by not having one done by a qualified expert,” says David Bakke, personal finance expert and author.

Home Inspections vs. Appraisals: What’s the Difference?

An appraisal evaluates and determines the market value of a home, whereas a home inspection evaluates and presents findings about the physical condition of the home.

An appraisal is a formal evaluation of the value of a home by a certified real estate appraiser. It doesn’t serve as a substitute for a home inspection, which helps the buyer better understand the home’s condition and identify either existing or potential future problems that aren’t immediately clear to the typical person. 

Home inspections typically are done by specialized home inspection companies or independent inspectors. While your mortgage broker will often handle the appraisal order, home buyers commonly are able to decide who to hire for the home inspection. Real estate agents and mortgage brokers can be a good place to start for home inspector recommendations, but friends and family who have purchased homes in an area can be great sources too.

With a home inspection, the buyer can use anything that needs to be fixed, replaced, or repaired as leverage to negotiate with the seller before the sale is finalized. Sometimes, a seller will agree to address issues as part of the sale or take less in sale proceeds as a “credit” that diminishes the cash a home buyer will need to bring to closing. Other times, especially in highly competitive sellers’ markets, buyers may decide not to negotiate over issues found in a home inspection but at least have the knowledge to know what they’re getting into with the home. 

Appraisals are ordered by a lender as a mandatory requirement prior to closing on the home. For a lender to put up the cash needed for a home purchase, the appraisal offers assurance they are loaning an amount that is aligned with the market value of the home. Home inspections are not required and function primarily to give the buyer peace of mind or actionable insight into the state of a home. 

Think of it like this: An appraisal protects the lender’s financial interests and a home inspection protects the buyer’s financial interests.

While they have different purposes and processes, appraisals and inspections do have some things in common. Both can reveal issues that could impact the sale, as well as help you feel certain in your decision to either purchase the home or walk away under the terms of a contract. And both are paid for by the buyer. 

How Do Home Appraisals Work?

Whether you’re a seller or buyer, you’ll want to know how the appraisal process works and how an appraiser determines the value of your home. 

Since lenders will not loan you more than the house is worth, if the appraisal finds the house is worth less than your offer, you will need to make up the difference yourself or get the seller to help you by accepting a lower offer. 

Unfortunately, there’s no way to tell whether a home will be under-appraised or over-appraised, according to Charlie Yawar, a real estate agent with Aaron Kirman Group in Los Angeles. “There have been circumstances where I thought the appraisal was going to be a slam dunk and it’s under-appraised. I’ve had properties that I felt sketchy about and wasn’t quite sure if we would make the appraisal amount, and we’ve been fine,” says Yawar. “So there’s no rhyme or reason; there’s no guarantees. You basically just have to have confidence in the comparable sales you pull for the house.”

Ultimately, the appraisal process and outcome is out of your control, but that doesn’t mean you are helpless to prepare. For example, you can work with your real estate agent to review comparable home sales in your area in order to form an educated view of what your home could be worth based on nearby recent home sales activity. 

While the final appraisal may find your home is worth more or less than you expected, staying on top of comparable sales can help so you’re not as surprised later by the appraised value of your home. 

What do appraisers look for?

The appraiser usually works alone to determine a property’s value, and interaction with the seller and the buyer is kept to a minimum. The physical walk-through to see the home is only a piece of the appraiser’s overall report, and it is completed fairly quickly. The rest of the appraisal process relies on the neighborhood, different features of the home, the square footage, and recent comparable home sales. According to PennyMac, a large national mortgage lender, these are common things that appraisers consider when assessing a home’s value:

  • Size of the property
  • Exterior condition of the home
  • Interior condition of the home
  • Home improvements and renovations

How COVID-19 is changing appraisals

The appraisal process has changed substantially during the COVID-19 pandemic.  Appraisers are considered essential workers in some states but not in others, and it gets even more complex when some towns and counties consider it an essential service while other areas within the same state do not. 

Also, recent reporting has found many lenders are postponing or even waiving appraisals altogether. In some instances, appraisers will do a drive-by appraisal and examine only the outside of the home. In other cases, homeowners and appraisers are connecting via Zoom or FaceTime to do a virtual tour of the home. Talk to your lender directly to see what your appraisal options are. 

“Many people don’t want a stranger walking through their house nowadays to do an appraisal,” says Warren Goldberg, president and founder of Mortgage Wealth Advisors in Plainview, New York.

How much does an appraisal cost?

There are several factors that impact the cost of an appraisal, but expect to spend at least a few hundred dollars. The average cost of an appraisal is roughly $336, according to HomeAdvisor, a digital marketplace that connects homeowners with service professionals for home projects. According to HomeAdvisor, most people pay between $312 and $404, although some will pay as little as $250 or as much as $600 to $1,000 for an appraisal. The price varies widely and depends on how much work the appraiser has to do and the size of the property.

How Do Home Inspections Work?

A home inspection normally takes place right after the seller accepts the buyer’s offer. Most real estate contracts include a period of time in which the buyer is granted access to the property for home inspections and negotiation over the findings of the home inspection. 

Inspections are done by an individual inspector or a small team of inspectors, depending on the company. The inspector will look at the condition of the roof, HVAC system, plumbing, electrical, foundation, and much more. You can also get additional inspections for specialized things like termites, chimneys, or mold. 

Under normal circumstances, the buyer usually has the option to shadow the inspectors as they work through each room to ask questions, but that may no longer be the case amid the pandemic. To reduce the potential spread of COVID-19, many home inspectors will do the inspection alone and wear protective gear (mask, gloves, etc.). Once complete, they’ll give a full report on the house and detail any areas of concern. Some inspectors have loosened their attendance policies since many stay-at-home orders have been lifted, and will allow up to two clients plus their agent to attend the inspection. 

If there are major issues, work with your real estate agent to see about negotiating repairs or cash credits with the seller.

A home inspection is physically demanding and all accessible spaces have to be inspected, including attics and crawl spaces. As a result, home inspections take an average of two to two and a half hours (one to one and a half hours for a condo) and inspections for larger homes can easily take even more time to complete. 

How much does a home inspection cost?

The worst thing that can happen after closing are unexpected home repair expenses that you weren’t made aware of beforehand. That’s why getting a home inspection is so important during the process, although it’s not required to buy a home. The average home inspection costs around $315, according to HomeAdvisor

HomeAdvisor estimates inspections for condos and small homes under 1,000 square feet can cost as little as $200, while inspections for bigger homes over 2,000 square feet could go up as much as $400 or more. While hiring a home inspector is an extra cost up front, it could save you hundreds or thousands of dollars on costly repairs in the long run. 

Do your research on home inspectors in your area, take a good look at their qualifications and experience, and see which one has the best deal.

How to handle home inspections during COVID-19

Like appraisers, home inspectors are not viewed as essential workers in all states. But that doesn’t mean home inspections are not happening. In some states, such as Minnesota, the buyers are now given the option to attend the inspection as long as they follow certain guidelines, such as limiting the size of the group, wearing a mask, and maintaining a six-foot distance. 

Make sure to ask the inspector ahead of time how they plan to inspect the home and what extra precautions they’ll take in light of COVID-19. If you can’t attend the inspection in person, ask the inspector to take detailed photos or see if they’re willing to schedule a FaceTime call during the inspection. 

Why You Need a Home Inspection and an Appraisal

Most home sales involve both an appraisal and home inspection, since both are important for the buyer to understand what they’re investing in, as well as negotiate a fair price for the home.

On the seller’s side, appraisals and inspections keep them accountable and can end up boosting the minimum offer they’ll accept. Jennifer Harder, a mortgage broker with MortgagePal in Victoria, British Columbia, Canada, says by having both an appraisal and a home inspection done, you can go into your home purchase with both eyes wide open. 

“You can’t substitute one for the other, and you’ll want both,” Harder said. “The last thing you want is to move in and find out that you’ll need thousands upon thousands more dollars in repairs.”