How to help buyers understand appraisals and inspections
These evaluations have the potential to make or break a transaction, and many buyers will have questions about what’s involved — and what’s at stake.
For many buyers, appraisals and inspections can feel like costly hurdles to get through on the way to closing. Some might not understand the difference between the two — or why they matter.
As an agent, you know the ins and outs of these home evaluations, but after explaining them to your buyer, it can be useful to provide a reference they can come back to. That's what the National Association of Realtors is hoping for as it continues its campaign to educate consumers.
NAR's series of one-page guides — including its latest two covering the appraisal process and home inspections — can be accessed by buyers and sellers, but the association is also counting on agents to introduce these resources to their clients.
Here's what NAR is telling buyers about appraisals and inspections:
What they are — and how they differ: An appraisal is an assessment of a home's value, and if a buyer is applying for a mortgage, it's generally required by the lender. Lenders want to make sure the purchase price reflects the actual value, NAR explains, because it reduces their risk — but it can also help buyers avoid overpaying. Home inspections, on the other hand, are not required. They are an assessment of a home's condition, and they protect the buyer by uncovering any unexpected or costly problems with the home. Appraisers will also consider the home's condition as one factor when determining its value.
Who conducts these assessments? Appraisals are done by licensed or certified professionals. While the bank typically initiates the appraisal process, the appraiser doesn't work for the lender — nor do they represent the buyer or seller. They are an independent third-party and required to provide a "fair and accurate valuation of the property," NAR states. Home inspectors are not regulated in all states, and even in states that mandate licensing, requirements vary considerably. The guide notes that if an inspector is a member of certain trade groups, that means they are trained and certified, but also suggests buyers ask their agent to refer them to a trusted inspector.
What they're looking for: NAR explains that an appraiser usually looks at recently sold properties in the area and the home's characteristics to come up with a value. The home's condition and any recent improvements might also be considered. The appraiser may do a thorough walkthrough of the home, but sometimes they can collect data remotely. A home inspection, however, will always be conducted in person, and covers the inside and outside of the home, including its systems (like electrical, HVAC and plumbing) and sometimes invisible issues like radon gas and lead paint.
Waivers and contingencies: While most lenders require appraisals, they can sometimes be waived, NAR says. Home inspections can always be waived by the buyer. The decision to waive one or both assessments can help a buyer's offer stand out, but it involves some risk, NAR cautions. Contingencies, on the other hand, can make an offer less desirable, but they protect the buyer. An appraisal contingency can help the buyer avoid financing issues, while an inspection contingency gives the buyer an out — or room to negotiate — if major problems are uncovered. While NAR doesn't explicitly recommend an inspection contingency, the guide notes that "inspections can help inform buyers and flag costly problems they may not notice until after move-in."
Interacting with appraisers and inspectors: Agents can communicate with the appraiser to provide information about the property, but, the guide emphasizes, they cannot attempt to influence the appraisal process, and appraisers may be limited in the information they can share with agents. If the agent or buyer believes the appraiser "did not consider important information about the property or available comparables" — or they appeared to be biased — NAR explains how to ask for a reevaluation or file a report with a regulatory agency. As for inspections, NAR suggests buyers tag along: "It can be very beneficial for a buyer to join the inspector as they do their work" to learn where different systems are located and see any problems first-hand, the guide states.
What else is NAR telling buyers? The consumer guides, published on NAR's "facts" page, cover a variety of subjects aimed at educating buyers and sellers, including settlement-related topics, questions to ask agents and transaction details.