Appraisal vs. Inspection: What California Home Buyers Need to Know

Home buyers in California sometimes confuse the home inspection with the home appraisal, and vice versa. This subject can be especially confusing for first-time buyers who have never experienced either process.

To add to the confusion, there are certain types of property appraisals that also have an inspection component built in. It’s no wonder why people find it confusing. So let’s clear this up!

Home Appraisal vs. Inspection

Home appraisals and inspections are an important part of the buying process, for all parties involved.

But what’s the difference between them?

• Home appraisal: Helps to determine the current market value of the property being purchased. The primary goal is to find out how much the home is worth in the current market, based on recent sales activity.
• Home inspection: Helps to determine the overall condition of the home, from the roof to the foundation and most things in between. The primary goal is to discover any potential defects or issues that might become a problem down the road.

This is the main difference between appraisals and inspections. In California, the home appraiser focuses on the market value of the house being purchased. An inspector, on the other hand, will evaluate the condition of the property including all installed systems.

Home Appraisal: Determines the Property’s Value

In a typical real estate transaction, the appraisal is requested by the buyer’s mortgage lender. The lender wants to ensure the property is worth the amount that the borrower has agreed to pay for it. The process results in an appraiser’s report that includes an estimated value.

Lenders typically base the loan amount on the appraised value of the home, not on the asking price. That’s why the appraisal process is so important to both the buyer and the seller. It can affect negotiations as well as the final outcome.

• Definition: A home appraisal is an unbiased estimate of a property’s market value, conducted by a licensed appraiser.
• Purpose: Mortgage lenders in California usually require an appraisal to ensure the property’s value matches (or exceeds) the loan amount. They’re required for most mortgage loans, including FHA and conventional.
• Process: To estimate the value, the appraiser will evaluate factors like the home’s condition, size, location, and recent sales of similar properties in the area.
• Cost: The buyer usually pays for the appraisal since it’s required by their lender. The cost typically ranges from $400 to $600. It can be paid on the spot or as part of the closing costs.

The main point here is that California home appraisals focus on valuation, as opposed to the property condition.

Home Inspection: Assesses the Property’s Condition

Unlike the appraisal, the home inspection process does not determine the value. In fact, a home inspector will offer no insight as to the market value of the property being inspected. That’s not their job.

Instead, the inspector will perform a comprehensive review and assessment of the home being purchased. It’s the buyer who hires the inspector, so the inspection is performed on their behalf. This process gives the buyer more insight into the property’s overall condition, including future repairs that might be needed.

• Definition: A home inspection is an evaluation of a property’s condition, conducted by a licensed inspector.
• Purpose: Some buyers in California choose to have an inspection prior to purchasing a home so they can learn more about its true condition, including potential repair items.
• Process: The inspector will visit the home to evaluate the structure, roof, foundation, plumbing, electrical, and more. They look for items in need of repair as well as safety issues. They’ll compile their findings in an inspection report and review it with the buyer.
• Cost: The buyer usually pays for the inspection since it is conducted for their benefit. The cost typically ranges from $350 to $500. Home inspectors typically require payment when the service is performed.

The main point here is that California home inspections focus on the property’s condition, rather than its value.

Are They Both Required in California?

As we’ve covered in a separate blog post, home inspections are usually optional in California. This is true for both conventional and government-backed mortgage loans, like FHA and VA.

A home buyer in California can choose to have an inspection, or not. It’s entirely up to you.

That being said, home inspections do provide valuable insight into the property’s condition. An inspector will be able to spot issues with the home that you might not even notice. They have a keen eye for such things, and usually a lot of experience.

So if you’re concerned about future repairs and/or safety-related issues, you might want to have an inspection performed prior to purchasing.

The home appraisal process works differently. If you’re using a mortgage loan to finance your purchase, the bank or lender will most likely require an appraisal to be performed. They do this to determine the market value of the property, since they are providing funds toward the purchase.

• Buyers can choose whether or not they want to have a home inspected.
• But mortgage lenders usually require an appraisal for purchase loans.

FHA and VA Loans Are a Little Different

Unlike a conventional loan, FHA and VA loans receive government backing in the form of insurance or guarantees. This backing offers extra protection for lenders, allowing them to be more flexible when approving borrowers.

Because the government is partly involved in these loans, the home appraisal process works differently.

With a conventional loan, the appraiser is only concerned with the market value. But with an FHA or VA-backed mortgage loan, the appraiser must also ensure that the house meets the supervising agency’s minimum property requirements.

Here are two related articles that explain those criteria:

VA loan property requirements | FHA loan property requirements

5 Important Points to Take Away From This

We’ve covered a lot of important information in this guide. Here are the most important points you should take away from all this, as a home buyer:

• Home buyers in California sometimes confuse inspections with appraisals. But they are two different procedures with different objectives.
• Home appraisals determine a property’s market value. They are typically required by mortgage lenders to ensure the property is worth the loan amount.
• Home inspections assess the property’s condition, looking for potential defects and issues. They are optional but can provide valuable information for buyers.
• In California, the buyer usually pays for both the appraisal and inspection. That’s because these events happen on the purchasing side of the transaction.
• FHA and VA loans require additional property standards to be met during the appraisal process. Conventional appraisals, on the other hand, focus solely on the market value.