CASEY DURANGO. Realtor®.

I get this question often from both first-time buyers and those who have purchased property before. It’s a good question. And at some point a buyer will often wonder whether the appraiser, home inspector, Realtor, lender and all other parties involved in the transaction are happily colluding in order to close a deal, whether or not it’s in the best interest of the buyer.

There’s no doubt that there have been unscrupulous “professionals” who have engaged in a wink-wink/nudge-nudge mentality or turned a blind eye to issues that should actually raise red flags and perhaps stall or tank the deal. But those parties have always been in the minority and now that a bright light is being shown on real estate loans, they’re running back under their rocks. They’ll most likely turn up in another industry but, thankfully, they’re going to find it more difficult to jack things up in real estate.

But back to the main topic: The difference between an appraisal and a home inspection is that the appraisal determines the dollar value of a property. A home inspection checks out the soundness of the main systems of a property to see if things are working as they should.

The appraisal is required by the bank to verify the house is worth what they’re lending.

The home inspection is not required by anyone but is always a good idea.

You as a buyer will generally be expected to pay for both the appraisal and the home inspection, and usually “up front”. That’s a good thing.

Why?

Because it should give comfort to know that the appraiser and the home inspector won’t have a vested interest in whether the transaction goes through or not. They’ve performed the service and been paid. If the deal falls apart, it won’t impact them. So you as a buyer don’t have to worry that people who are supposed to being verifying that you’re buying a good house aren’t setting you up for failure.

I’ve also been asked how it is that the appraisal can come in exactly where the contract price is. That has made more than one of my buying clients scratch their heads. And I understand how it can look fishy. “How can the appraisal come in EXACTLY at $219,900 when that just happens to be the purchase price? What’s up with that??”

The reason is that the appraiser knows the contract price as soon as they get the order. They are hired by the bank - although the buyer pays for it - in order to verify the value. The bank wants to make sure that they are making a good loan. The appraiser’s job is to support the price.

But if they can’t, they won’t.

I’ve had lenders advise me that an appraisal has come in lower than the contract price on a pending sale. Fortunately, very often the seller will just adjust the price and the buyer comes out even better. At the very least, the standard “Offer to Purchase And Contract” that is used by Realtors here in North Carolina protects buyers from having to close on a property when the appraised price is not at or above the contract purchase price.

In short, if the appraisal comes in lower than the contract price, the buyer is not obligated to close.

The home inspection is a whole different story and will be for another day. Or three. (Inspections are where transactions can get REALLY interesting!!)

This entry was posted on Friday, January 18th, 2008 at 2:34 pm and is filed under General Real Estate FAQs, Ist Time Home Buyers, Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.