Inspections vs. Appraisals
In response to an article posted on DSNews.com entitled “Zillow: Prospective Home Buyers Overestimate Home Value Appreciation” where the author writes about buyers being confused about the difference between inspections and appraisals, I thought I’d post a simple explanation should you be one of those prospective home buyers.
An appraisal is a professional opinion of a home’s value. When you purchase a home using a lender, while in escrow, the lender will order an appraisal to ensure that the home is worth at least what you’ve agreed to pay for the home. If an appraiser reports a value lower than the contract price, your lender will not underwrite the deal unless you cover the gap with funds at closing. You could also negotiate a lower price, or simply walk away. Either way, it’s simply an opinion of value used to gauge the agreed upon price. In a cash deal, a buyer might waive the appraisal, but he or she may also want to conduct an appraisal to ensure they’re not over paying for the property.
When you and the seller come to an agreement on the price of the home you are considered “under contract.” In the Arizona Purchase Contract there is a section called Due Diligence. This is where your inspection time frame is defined, which is typically 10 days, but always negotiable. During that 10 days, it is your responsibility as a buyer to conduct as many inspections on the property as you feel comfortable with. Usually a single general inspection is enough, but sometimes the general inspector recommends that you find a specialist to confirm potential findings. Inspections have nothing to do with the appraisal, although an experienced appraiser will often identify potential problems that a general inspector would also find. At the end of the inspection period, the buyer writes a notice to the seller (the BINSR) with their findings, asking for repairs, backing out, or accepting the property as it is with no changes.
Both the Inspection and the Appraisal are considered contingencies on the contract that can kill the deal. If the house doesn’t appraise, you won’t get lending, or can walk away or renegotiate the price. If the inspection reveals a plethora of potential problems, you can also walk away or ask the seller to remedy the problems prior to close of escrow.
Both are recommended for cash buyers. The appraisal is required when you get a loan to buy.