Ask Our Broker With Peter G. Miller
By Peter G. Miller
CTW Features
Question: Our real estate broker says we need to get both an appraisal and a home inspection to buy a house. We don’t get this. Isn’t it the job of the appraiser to tell us if the house is in good condition?
Answer: Your real estate broker is seeking to protect your interests, a proper thing to do.
When you buy real estate with financing, the lender will require you pay for a property appraisal. The appraiser will be hired by the lender in an effort to determine the fair market value of the property and prevent “over lending,” the origination of a loan that is too big.
The job of the appraiser isn’t to endorse or repeat the contract price for the property unless justified by the fair market value. In turn, the lender will make a loan based on the appraised value or the contract price, whichever is less.
The appraisal effectively limits the ability of a purchaser to pay too much because if the contract price is too high, the lender simply won’t make the loan.
The appraiser asks what’s the fair market value of the property, while the home inspector asks if stuff works. The inspector will try appliances, look for leaks and check various household systems while the appraisal will consider the property and nearby homes.
While there is some overlap between appraisers and home inspectors, what they do is very different. For example, if a borrower purchases a home and requires a mortgage, the lender will demand an appraisal, but not necessarily a home inspection.
Looking toward the future the current arrangement could change. For example, it used to be that borrowers could get property insurance simply by signing a check. Now, however, insurers are increasingly concerned about the property’s condition. In some cases, and in some areas, if a home is 20 or 25 years old, the insurance company may require a “four point” inspection before it will issue a policy.
The insurance company’s inspector will look at the electrical system, the home’s heating and air-conditioning systems, plumbing and roof. If the insurance company is unhappy with the results, the homeowner will either have to make changes to the property or find insurance elsewhere. In states where property insurance is hard to come by, the decision of the insurance company to require an improvement is effectively final, regardless of how ridiculous or costly to the owner.
It won’t be surprising if down the road mortgage lenders adopt a similar standard. After all, a home is security for the mortgage and lenders have a very big incentive to make sure that the property is in the best possible condition.
© CTW Features
Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.
