While typically these steps affect the buyers’ side of the deal slightly more, a low appraisal for a seller can be a nightmare. Appraisals and inspections function similarly but are used for different purposes.
What is an appraisal?
An appraisal is typically required by the lending bank to protect themselves by not lending more than the home is worth. They usually hire the person who does the appraisal and could make or break the deal. A home appraisal can cost anywhere from $300-$500 and is typically paid by the buyer upfront, however the cost is typically negotiated in closing, which the seller may give credit towards.
The appraiser visually inspects the home and assesses it’s value. They are looking at location, structural condition, renovations, and recent sales in the area of comparable homes.* Square footage and the number of rooms are typically considered in home comparisons.
If the home is appraised at a higher value than the sale price, that is certainly a boon for the buyer and automatic equity upon purchase. However, if the appraisal comes in lower, that could throw a monkey wrench in the deal. That means the bank won’t be willing to lend you over the valued amount, forcing the buyer to cover the remaining cost. This can happen particularly in “hot” housing markets where buyers are compelled to make bids against steep competition. There is some recourse in this instance other than walking away.
A skewed appraisal does not only affect the buyer but the seller as well. Appraisers aren’t perfect and there are many homeowners who act in order to appeal appraisals they feel are inaccurate and unfair. The lending bank typically has a process in place to challenge an appraisal, because unfortunately, this isn’t an uncommon occurrence in a continually fluctuating market.
What is an inspection?
Another upfront responsibility of the buyer, while they could theoretically skip this step, it would not be smart to do so. The difference between a home appraiser and a home inspector are many. While an appraiser doesn’t work in favor of the buyer, seller, or even the bank, a home inspector is hired and working in the buyer’s best interest. A home appraiser additionally is not responsible for functions of the home and only does a visual inspection and property comparison. An inspector will test for radon, asbestos or mold, will consider HVAC, and other home functions such as electrical systems and plumbing.** It is wise for the buyer to be present at the inspection to truly gauge the seriousness of each reported condition.
The whole point of a home inspection is to protect the buyer from purchasing a “lemon.” They may be made aware of problems or replacements to expect in the next few months or years, however, an inspection is not any type of guarantee.
A seller may also choose to have a home inspection made before listing the property in order to be proactive in addressing any issues. Once a problem is known, it becomes “material fact” and must be disclosed to all future potential buyers.
Many times, if a seller conducts a home inspection, the buyer will want to take a peak without shelling out the cash, or conversely, if a buyer orders an appraisal, the seller wants to see how their property fares. Either way, the other party may want to see the results of a home inspection or appraisal that they did not pay for. The appraiser or inspector is only liable to the person who paid them. This can often be a point of contention between buyers and sellers. Instead of involving yourself, be sure to work through your trusted Realtor through these potentially tricky steps!
Resources: Realtor.com | thebalance.com
Stay tuned for Part 3 - Repair Addendum
