Whether you’re buying or selling a home in New Jersey, a home inspection and a bank appraisal will be part of the process. If you’re new to the real estate process, then it can be unclear how these two steps are different from each other. Let’s break it down.
What is an appraisal?
When you buy or sell a home, a licensed real estate appraiser who works for the buyer’s lender will determine the “appraised value” of the home. Banks never want to lend more than a certain percentage of a property’s value. We refer to this as “loan to value ratio” or LTV. This is calculated by dividing the appraised value of the property by the amount borrowed, expressed as a percentage. For example, if you buy a home appraised at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000 — a 90% LTV.
Appraisers use several pieces of data to arrive at their appraised value number. They will look at where the home is located, how big the home and the lot are, and the condition of the property. They will also look at very recent (last 3-6 mos.) selling prices of comparable homes in your neighborhood. During the appraisal, they’ll be looking for conditions that impact the value of the asset and thereby the risk to the lender. Environmental issues or obvious issues with habitability of the property can impact a lenders willingness to finance a purchase. If a home is appraised for less than the purchase price, this can determine whether or not the transaction can proceed. The seller may need to reduce the price, or the buyer may need to increase their down payment to offset the discrepancy. Having a local market expert as your realtor can help you avoid appraisal issues. We can provide helpful data to appraisers so that appraisal issues are avoided.
What is a home inspection?
A home inspection is conducted by the buyer as part of their due diligence in making a purchase. Hired by the buyer, an inspector will look at various elements of the home including the HVAC system, plumbing, electrical work, roof and structural components. Many buyers will also ask their inspector to look closely at the fireplace and chimney, sewer lines and check for environmental hazards like oil tanks, mold, radon gas and asbestos. They will also look for signs of fire, water, or insect damage. The buyer receives a written report of the inspector’s findings. The inspector will make suggestions of needed repairs and any other concerns that they have about the condition of the home. Home inspections are typically conducted after the sales contract has been signed. These contracts will often contain inspection contingencies that give buyers leverage to ask a seller to make repairs/offer credit or to cancel the sale if need be. Real estate agents and attorneys can help buyers and sellers put the results of these inspections into perspective and resolve any issues so that transactions may proceed.
What are the real differences?
While these two steps in the closing process have many similarities, they also have key differences. An appraiser’s main function is to determine what the value of the home is. An inspection helps to educate the buyers about the condition of the home they are purchasing. It lets buyers know what problems currently exist within the home and repairs that may need to happen in the near future.
When you’re buying or selling a home, the process can be confusing — especially if you’re doing it for the first time. That’s why it’s so helpful to work with a real estate professional. Having an expert on your side will give you the knowledge and confidence you need to successfully close on the home. If you have a real estate question or need that you’d like to discuss feel free to contact me at [email protected].
The Allison Ziefert Real Estate Group is a top producing real estate team based at Compass in Short Hills, NJ. We are local market experts, specializing in real estate and homes in Maplewood, South Orange, Millburn/Short Hills, Montclair, West Orange, NJ and the surrounding towns. We are driven by earning great testimonials and referral business from happy clients. You can read our testimonials here.