Inspections and appraisals: two terms that commonly get misconstrued in the real estate world. That’s why we want to break down what each of the terms means, the difference, and when you would need each.
What is the Purpose?
Number one, the inspector’s job is to report to you on the condition of the home. The appraiser’s job is to report to the lender on the value of the home. The inspection is to show you the imperfections in the home. Their job is not to tell you that your home is perfect, it’s to tell you all the ways that it can be improved. The appraiser is there to justify the loan amount to the lender. So they have to show the lender based on comparables, conditions, and everything else that the home is worth what you’ve agreed to pay for and what the lender has agreed to loan you for.
When is it Done?
Next, the inspection is usually done during due diligence. It’s not necessarily required, but if something comes up and the condition is significantly different or worse than you expected, this is your opportunity to negotiate. You can ask for repairs, a credit, a price reduction, etc. With an appraisal, you usually have an entire contingency called the appraisal contingency. Where if it comes in low, you have few options. You can either bridge that gap in cash which you’ll hear people refer to as an appraisal gap, or you can negotiate. You can ask for a price reduction. Basically that’s it. If nobody asks for credit, you have none. You have to ask for a price reduction. But to get to the number, the value that the lender has agreed upon.