One of the most confusion things about buying a home is figuring out where all the costs go. Between property taxes, insurance, attorney and lender fees the closing costs can add up pretty quickly. In recent years the loan process has changed with buyers receiving increased documentation on what they are paying for earlier in the process. While documentation may have increased there is often still confusion between the appraisal and the inspection. These often get lumped together as performing the same role but in reality they are quite different.
The inspection is done for your benefit while the appraisal is done for the lender. Before your lender considers ordering the appraisal you should review the inspection first. The inspection is done by a third party company to point out any deficiencies in the property. As the name indicates they will inspect everything with the property including the foundation, plumbing, roof and even appliances. You want your inspector to be as diligent as possible to give you an accurate account of exactly what you are buying. After your inspector has reviewed the property you will receive a report detailing everything wrong with the property. Even newer homes will have something wrong with them or something that can be updated. It is important to focus on high cost items or structural issues. Once you get the inspection back and have an idea of the repairs you can decide whether you want to move forward with the property as is, request a credit for improvements or back out of the deal.
The appraisal is done to give your lender an estimate of the value. They will take into account some of the items on the inspection but will also look at recent sales and listings in the area. A third party appraisal will compare similar homes in the neighborhood and attach an estimate of value for the subject property. As a buyer you are looking for the value to come in at or just over the sales price. It is important to remember that the appraisal is just an estimate of value and not a definitive number. If the appraised value comes in below the sales price you have two options. The first is to proceed with the purchase and bring the difference of the appraisal amount and the sales price to the closing. The second, and most common, option is to go back to the seller and renegotiate the sales price down to the appraisal amount. Another option is to get a new appraisal either with a different lender or with a different appraisal company. While appraisals are subjective they are based on real data from the local market. Getting a new appraisal may do nothing but have you pay for a new appraisal only to get the same result.
The inspection is typically done as quickly as possible after the contract is signed to give you time to make an informed decision on the property. Knowing that both the inspection and appraisal are done for your protection should give you confidence when making an offer.