Comparing the Home Inspection, Home Appraisal and Assessed Value

 

We want to take this chance to explain to you the difference between the home appraisal and the home inspection, and then the county’s assessed value of a home. Because, they are all three very, very different things.

The Home Inspection

Lets to start with the home inspection.

A home inspection is different than an appraisal. The appraiser is going out there and working for the lender in most cases, and his job is to tell us what’s the value of that home if we had to take it back from you and resell it. The home inspector works for you as the buyer. The home inspector’s job is to not give value, but to try to find mechanical and defect problems with the house.

A home inspector is going to dig up in the attic and look for insulation problems. They’re going to look at the wiring. They’re going to look at the roofing. They’re going to look at the AC unit. A good home inspector will give you a 10, 15, 20-page report of their findings, detailing line-by-line what’s good about the house and what’s bad about the house from a structural standpoint.

The idea is that you as a home buyer know, am I getting into a home that’s going to have a lot of problems as soon as I move in? The last thing you want to do is put your down payment down, move into a house, only to find out that you immediately have to replace the roof, replace the air conditioning unit, it’s infested with termites! These things can happen.

The home inspector is there to protect you. We recommend that clients get a home inspection early in the process, usually before the appraisal, because what’s the point of finding out the value if the buyer decides that the inspection is not there. If the home is not of sufficient quality and construction, and if it hasn’t been taken care of and maintained, then these things will be discovered by the home inspection.

Your home inspection is yours to keep. A lender will rarely even ask for the home inspection. There may be a situation where, if an appraiser comes back and says, “oh, the roof looks like it may have a problem”– well, if you’re home inspector has already detailed what that problem may or may not be, then we can use that to offset what the appraiser says.

Getting your home inspection is important, and in reviewing that, a lot of home buyers will get the home inspection and never look at it. You know, get the home inspection. Don’t just look at the cover page that says good, bad. Read through that home inspection. You may find something that you’re not comfortable with. You may find out that there is evidence of termites, and now you should get a termite inspection done by a pest control company. There may be evidence of rat droppings– you don’t want a house that’s infested with rats or roaches or anything else. So take the time to read that home inspection. That’s for your benefit. 

The Appraisal Stage

Getting into the next place, that’s the appraisal stage.

One of things we do at RP Funding is we don’t use what’s called an appraisal management company. We work directly with the appraisers. Some companies out there, because they’re mortgage brokers, or because of the way they’re structured, they cannot work directly with the appraiser. They have to go through a middleman, an appraisal management company.

What we find is this raises costs to consumers and lowers quality of the report, because an appraisal management company will bid that report out and say, who will do it for the cheapest? So they’re going to charge the customer way up here, and then go try to find an appraiser who will do it for way cheaper. Then they get to pocket the difference– that’s their business model. So if all of a sudden there’s an appraiser 200 miles away who’s down on his luck and really needs to work that day, he’ll bid super low and come do that appraisal when he doesn’t really understand the area.

We work directly with our appraisers. We’ve got great relationships. Most of the appraisers we work with, we’re their largest client, because we go directly to them, and we use them over and over again. So we’ve got a great relationship, so we get faster service and, I believe, a higher quality of work from those appraisers.

The appraiser’s job is to go out there and give us the value of the home. Now, a lot of people get concerned– oh, I got to clean up the house, I need to make the house look as good as possible. I mean, I think it’s nice if the appraiser doesn’t walk into a disaster, but cleaning your house is not going to affect its value.

The appraiser is there to look at square footage, bedrooms and bathrooms, overall quality of construction and quality of amenities. If one house has linoleum flooring throughout, another has very nice hardwood floors and tiles, that will make an impact. Corian countertops versus Formica– it’s not a dollar-for-dollar impact, but it will cause them to compare you to other similar houses. If half the houses in your neighborhood are really nice countertops and really nice cabinets and flooring, and half are not so nice, yours will be compared to whichever set you’re closest to.

What they do is the appraiser comes out and he looks at the house. He’ll measure the rooms. He’ll verify the square footage. He’ll look for very, very glaring defects– hole in the roof, broken windows, missing kitchen, missing toilets.

He’s not a home inspector. He’s not there to give you that checklist long-term inspection. He’s just there to make sure as a lender, we’re not getting into something we don’t want to get involved in, because the home is really damaged.

What he does is he figures out your square footage and your bedrooms and your bathrooms and your basic overall quality, and then he goes to look for other homes that have sold recently nearby that are similar. So if you’ve got a three-bedroom, two-bath, and it’s 2000 square feet, he’s going to say, OK, well, what did the last three-bedroom, two-bath house that was 2000 square feet sell for? Well, that’s a pretty good indication of what your house is worth.

Now, let’s say that he finds a house that’s only 1800 square feet. He has to adjust that value upward to what it would have sold for had it had the extra 200 square foot. This is how the appraisal works.

As a customer, you’re entitled to a copy of this appraisal report. We provide it to everyone. As soon as we receive it, we turn around and we provide it to the client so you could review it and you can see it. Once upon a time, lenders tried to hide the appraisal from the customer– it was the craziest thing ever.

We do have to provide that to you, and we provide it to you as soon as we get it. Because I encourage our customers to read through it. Take a look at it. See what other homes sold for.

And so what happens sometimes is the appraisal will come in low. So you’re trying to buy the house for 220, and the appraisal comes in at 210. And sometimes customers will get upset about this– well, the appraisal came in low! You’re going keep me from getting my house! Well, I ask you, do you want to pay 220 for a house only worth 210?

Well, there’s another lender who tells me they’ve got an appraiser who can get it to appraise for 220. OK, but is that really what’s in your best interest as a buyer? Do you really want to overpay for this house? This is such a huge financial situation– do you want to walk in $10,000 upside down from day one because you tried to find a crooked appraiser who would jack it up and give you the value you wanted versus the value that was justified?

And in fact, Fannie Mae has just rolled out a new tool to prevent this from happening, where they’re actually going to run an automated check on all the appraisals upfront before closing. So a lot of this bad behavior is going to go away.

But as a customer, why would you want to pay more than what a house is worth? You shouldn’t! If the appraisal comes in for less than what you’re trying to pay for that house, look at that as a good thing. That’s saving you from having to buy the house for more than what it’s worth, right? I mean, come on!

The appraiser’s job this to go out there and figure all this out and make sure that the home is worth what you’re paying, because the worst thing we can do for a consumer, and for a homebuyer, is put them in a house that’s already upside down. So the appraiser has a very important job.

Assessed Value of the Home

Now, the thing people get confused about is the tax assessor’s value. Just because the appraiser goes out there and tells us that house is worth 300, it does not now mean that the county tax assessor is going to raise his value up to 300. Thank goodness, because all of our property tax bills would be considerably higher.

What we see, on average, is the county-assessed value is around 75% of the value that an appraiser would give it, which is helpful, because that means you’re going to pay less property taxes. But a lot of people, when they go to refinance their house, or they go to sell their house, they take a look at this and say, oh, well, the county says my house is only worth $200,000, and I owe 220! I’m upside down! You’re not upside down. That county-assessed value is always going to be about 25 percent less than what a licensed real estate appraiser would give value to for that house.

That makes it a lot simpler. But there’s always confusion. People will always say, appraisal, assessed value, they don’t match! How can that possibly be? And they don’t realize one’s based on taxes, another is based on comparables around the neighborhood.

The three big takeaways are you’ve got your home inspector– this is who works for you, who goes out to make sure the mechanical and structural effects of the house are in working order and are good. Then you have the home appraiser, whose job is to go out there and make sure that the home’s value is accurate and that you’re not overpaying for that home. And he’ll look for some major defects, but mainly he’s there more looking at value. And then, finally, you’ve got the tax assessor, which is the county telling you what they think the home is worth in order to tax it and to give you a tax bill.