S2E46 – Appraisals vs. Inspections: What’s the Difference?

Are you in the market to buy a home and wondering the differences between appraisal vs home inspection when buying a house? How does an appraisal work? How does a home inspection work?

In this video we discuss how the appraisal process works along with how the home inspection process works as we help you become The Educated HomeBuyer

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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach Realtor: What’s the difference between a home inspection and an appraisal? When buying a home, there’s two different things that typically happen during that home buying process that result in whether or not you decide to move forward with that home or potentially back out. And in today’s episode, we’re going to dive into two of those things, which are the home inspection and the appraisal.

And a lot of buyers get these two confused, Josh. They think sometimes they’re one in the same. Sometimes they think an appraisal is different than it actually is. So we want to provide a little bit of context here and help you become The Educated Homebuyer. So Josh, when we think of appraisal, home inspection, you’re typically dealing with one more than I am and vice versa, but what are your thoughts?

[00:00:55] Josh Lewis, Certified Mortgage Consultant: So from our end, the most important piece is the appraisal. For a lender, for the loan, what they want to know is that the property that is securing the loan is valuable enough to secure that loan. They don’t want to make a $500,000 loan on a $400,000 property. So the purpose of the appraisal is for the appraiser to go out and do a comparative analysis of other properties in the area and confirm that similar homes are selling for what you have agreed to pay for the home on a purchase.

Refinance is a little different because there’s really not a third party on the other side in the form of a contract saying I am willing to pay this. But the difference there is that it is not a formal inspection. You’ll go into the details of what that means, but people get confused in that there are elements to an inspection, especially with government loans. FHA specifically requires an appraiser to do elements of a visual inspection. They have to check out the cooking elements. They have to check out the heating. They have to take a look in crawl spaces and attics. So it’s really a very minimal inspection. 

And also when we look at VA loans. VA loans, the VA appraiser is required to check out and confirm that the property meets the minimum property requirements. That is an entire section of the VA handbook. But in simple terms, that is a degree of the home inspection.

But for the most part, the appraiser is going through and just determining that the value that you are agreeing to pay for the home is supported by the market so that both you and the lender are not in a bad position where you have borrowed or they have lent more money than the home is worth. 

[00:02:45] Jeb Smith, Huntington Beach Realtor: Yeah, and some of the misconceptions while we’re talking about appraisal before we actually get into the home inspection aspect is that hey, i’m in a transaction. I’m a buyer I waived the appraisal for one reason or another that’s been a lot over the last couple of years people have waived the appraisal. Therefore they’re going [00:03:00] Josh, why am I doing an appraisal even though I waived that appraisal. And on top of that something else to address while you’re answering that is the idea that if the appraisal comes in higher.

Am I able to use that additional money to help me through the purchase, or if it comes in lower, is the deal automatically dead? So when you’re circling back and talking a little bit about appraisal here, Josh, let’s talk about some of those misconceptions up front, because I think there are things to really help people understand how that appraisal process works.

[00:03:29] Josh Lewis, Certified Mortgage Consultant: Let’s start with that piece of an appraisal waiver. You are not waiving an appraisal. You are waiving the appraisal contingency. If you pay cash, you can say, Hey, I’m waiving an appraisal and not have that. But the lender is going to require you to have the appraisal done. 

So what you have waived is the ability that if that appraisal comes in low to go back to the seller and say, I have an issue, I need to back out it appraised for $50,000 less than I have agreed to pay for it. So from that perspective, on a purchase, almost every loan program is going to require an appraisal. Your government loans FHA, VA, USDA, on a purchase, there’s no exception, you are going to have an appraisal done. 

The secondary piece to that Jeb, which obviously a good place here to talk about this is Fannie Mae and Freddie Mac with a big enough down payment and a well enough qualified borrower and good enough data in their systems will sometimes issue an appraisal waiver on their end.

It’s not the appraisal waiver that Jeb was just talking about. That is you waving your contingency or your right to renegotiate if it comes in low. This is the lender saying, with your qualifications, with what we know about this property, we are accepting the agreed upon value. So what does that mean?

I’m getting old Jeb about 10 years ago, Fannie and Freddie started requiring, rather than just a PDF copy of the appraisal be in the file, that an XML copy be delivered. And that’s just a fancy word for a digital format that they upload into their system. So now they have a 10 year history of every appraisal that’s been done, gets uploaded into their systems.

So they have their algorithms that are doing the Zillow/Redfin thing. But more importantly, they have 10 years of data of condition, bed and bath count, size, on many properties. So maybe not the property that you’re buying, but many of the properties in the area. 

So with that, what we’re seeing, it is tightened up a lot now that home values aren’t as rapidly appreciating, their algorithm that determines when we get a waiver, you’re generally going to need to be putting 20 percent or down more. You’re going to have good to excellent credit and lower debt to income ratios. It’s calculating all of those and on a conventional loan, a loan going to Fannie Mae or Freddie Mac, you may be able to get that appraisal waived where the lender says. You don’t have to have it. 

Now that doesn’t mean you have to accept it. You may go, Whoa, I’ve never bought a home before. I don’t care that you’re accepting the value. I want an appraiser to go out, check out the property and tell me that they believe that the value is there. And then the last piece there, I think, Jeb, the [00:06:00] last question that you had asked is, what happens if the appraisal comes in high? 

And this most often happens on new construction that it’s a six, nine, 12 month escrow. And you put it under contract at a certain price. The market goes up three, five, seven, 10%. During the crazy times in 20 and 21, we had people saying, Hey, I’m doing 5 percent down, but it appraised for 20 percent more than I agreed to pay.

For every loan type except USDA loans, what is used for calculating your loan to value, so determining what your down payment percentage is, is the lesser of the appraised value or the purchase price on the contract. So let’s say again, that new construction example in January, you put it under contract for $400,000 and you come time to close or have your appraisal done in December, and it’s gone up and it’s now $450,000. 

Nothing can be done with that value because they’re going to go to the lesser of the two numbers. The appraiser is higher now, but your purchase contract is still at that 400, 000. So your loan to value is still going to be determined by your down payment and your investment into the property.

There is that one exception. USDA loans, when the home will appraise for more USDA doesn’t require a down payment, but they will allow you to finance your closing costs using that additional amount in the appraisal. But that’s big picture overview of what we’re looking at in terms of that appraisal. 

[00:07:23] Jeb Smith, Huntington Beach Realtor: And Josh, when we’re talking about appraisal, who pays for the appraisal? How long does appraisal take? Who does the appraisal? What’s the big difference now, Josh, in these times right now, 2023 is when this has been being recorded versus 2006, 2007, 2008, when I wouldn’t say appraisers were over inflating values, but the data wasn’t necessarily like it is right now, right?

And so, a lot of people are going, Hey, the appraisers were the big problem back in the day. They were doing this and that. Do we still have that problem right now? 

[00:07:55] Josh Lewis, Certified Mortgage Consultant: So the big change, at that time, a lender, me would have an appraiser that they work with in any given area and would say, okay, I need an appraisal in South Orange County so I use Montgomery and Associates for that. You would call them up and make your appraisal. 

So what the issue was is there were people who were both on the real estate and mortgage side who were pressuring those appraisers to bring in a certain value and say, no, my refinance only works at this number or no, the purchase has to come in at this level because it’s there. And if you don’t bring that in at that price, we’re not going to give you any more orders. 

So what we have now is all appraisals have to go through an appraisal management company. Or at least a firewalled appraisal desk inside of the mortgage company. So for us on the broker side, we’re always using a third party appraisal management company.

We make the order, they assign it out to appraiser. And then the appraiser replies or returns that report back to them. It’s goes through a quality control audit, and then is released back to us. If you’re with a [00:09:00] bigger lender, they can have an appraisal management desk within their company, where the sales person, the loan officer says, Hey, I need an appraisal, it goes to this desk. That person reaches out, gets it assigned to an appraiser, and then it comes back in. 

But the most important thing is there’s no direct contact between your realtor or your mortgage person with the appraiser other than to provide information that the appraiser may want or need. It’s not that we cannot talk to them at all. We cannot talk to them about, Hey, I think your value is wrong. I think you need to come in higher. Hey, our purchase price is this. It has to go higher. 

So where can that be a little bit different? On VA, we order the appraisal directly with the VA and the VA assigns it. But all other loan types are going to go through an appraisal management company or an appraisal management desk that is going to manage that function and make sure that no one is pressuring that appraiser to come in with a value other than what their professional opinion believes.

[00:09:55] Jeb Smith, Huntington Beach Realtor: Now, I jumped on and asked you a bunch of questions at one time, but who’s paying for the appraisal? Is it out of pocket? Is it waived? Is there a way for buyers to not pay an appraisal fee? How does that work? 

[00:10:07] Josh Lewis, Certified Mortgage Consultant: So really two questions there who pays for it and when is it paid for? Because one is unique. One is not. This is a closing cost. The cost of the appraisal is borne by you. We just talked about the benefit of appraisal management companies and how that sort of prevents undue pressure on an appraiser to bring in a higher value, but we now have a middleman. The middleman gets paid. 

So what we’ve seen inflation in everything over the last 15 years, definitely inflation in appraisal prices. They are more expensive. You can expect to pay anywhere , the cheapest for a full appraisal is probably $400-450, high end can be a $1000 or $1200. If it’s a complex appraisal, a very expensive home, but most appraisals are going to be in that $500-700 range.

So the interesting part is an appraiser does not want to do that inspection without getting paid. So it needs to be paid up front versus paid at closing. So it is a closing cost. It will show on your settlement statement as paid outside of closing, but nine times out of 10, you will offer up a credit card and it is charged up front and not included then in your closing costs later on in the transaction.

It will show on your settlement statement because it is factored into all your disclosures that is a closing cost that you are paying, but you don’t necessarily pay it at closing. I can say for us there’s a requirement that you have received and acknowledged and signed your disclosures before we can charge any fees.

So a lot of times with a solid purchase transaction with a borrower that I feel good about our relationship, we will go ahead and pay for it and collect through closing so that we don’t lose that one or two days in a short 17, 21, or even 30 day escrow. But I would be prepared as a buyer that you will put that on a credit card early in the process. And from the true closing cost perspective, that’s about the only thing that you would pay upfront prior to closing. 

[00:11:59] Jeb Smith, Huntington Beach Realtor: [00:12:00] Got it. So, really good information there. Now we talked about what happens if an appraisal comes in higher, but let’s talk the flip side, right? Market’s changing right now a little bit. Properties have been sitting on the market a little bit longer. There’s more of an opportunity, going forward that you’re going to see some appraisals maybe come in a little bit less than purchase prices to some extent. When markets start to shift is when you start to see that.

So in the case that appraisal doesn’t come into value, Josh let’s use, for example, just say a $500,000 purchase price. Appraisal comes in at $475,000, just for our conversation here. Can you, as a buyer, as a lender, as a real estate agent refute that price and say no, no, no. We don’t believe that’s accurate, the comps you used aren’t accurate, you didn’t use this comp in the, in the process, it’s a model match, blah, blah, blah. Or is there an opportunity to, renegotiate, which I’ll answer on my side, that, that piece of the puzzle. But something’s not right in the appraisal. How does that process work? 

[00:12:52] Josh Lewis, Certified Mortgage Consultant: You nailed it in that there are two options. If an appraisal comes in low, either everyone says no, that appraisal is wrong. And let’s do a rebuttal on the appraisal and try and get it corrected or revised to a higher amount. Or one or both or all of the parties go, Hey that is the value and then there’s a negotiation. You can go into that piece.

But if we believe that the value is incorrect and the sale price is indicative of the market value, we can go back and almost all loan types are going to be the same except for VA, but I’ll start with the VA process because it’s the best and they call it a request for reconsideration of value.

So the first thing on a VA loan, they cannot bring the appraisal in low without giving us a warning ahead of time. It’s called a tidewater notification. The appraiser has to tell us ahead of time, Hey, I don’t see the value. Please provide any and all information that you have that supports the value that you have in your contract.

The thing that’s really cool about this is once someone signs their name to something that says the value is X, if you go back and provide them additional information, it’s now a battle. I’ve said, it’s this, you’re saying it’s that, and we’re fighting. 

On this, it makes it less adversarial, and they’re saying, Hey, I’m not seeing what you’re seeing. Help me. On that situation, if the VA appraiser then still says, Cool, I see all your information. I still think you’re wrong. This is the market value. Forget the contract. Now we can go directly to the VA. The VA staff appraisers step in and do what’s called a reconsideration of value. That is far and away the most formal process, far and away the best process.

So for Fannie, Freddie FHA, any of the loan product types that we talked about going through an appraisal management company, we don’t go back to the appraiser and say, Hey, you’re wrong. Here’s why. Please bring it in higher because we were not allowed to attempt to influence them. 

We go back to the appraisal management company with factual information. We can’t just call them up and say, Hey, Jeb the Realtor says the thing’s worth $500k. Can you bring this into the higher value? We have to go back and say. Both realtors and borrowers believe the value is higher. Here is the data that we have. You used these comps and we think these comps are better or more accurate. Or you missed this one. Or the adjustments that you made based off of the other comparable sales are not accurate for whatever reason.

So we have to have a [00:15:00] valid reason why that original appraisal was inaccurate. I would say the majority of the time. Probably 70, 80 percent of the time, the value is going to stick. The rest of the time, you might get some increase and rarely will you get an increase actually back to that sale price.

But we absolutely, if everyone agrees that the appraisal is low and the sale price is correct, have a method for going back and getting it updated. 

[00:15:21] Jeb Smith, Huntington Beach Realtor: And one thing to keep in mind here, agents like myself, professional agents out there in the market, what happens is when an appraiser comes to appraise a property, one of the questions that often gets asked is as a buyer, am I there for the inspection?

No, you’re typically not there during the appraisal process. The appraisers there. They do measurements. A lot of times they’ve looked at the comparables prior to getting there. They’re just there to measure the square footage of the property, to see the upgrades, to take photos for the appraisal. 

On a typical 2000 square foot home appraiser is maybe they’re 20 minutes, right? It’s a fairly quick process. With that being said though. One of the things when it comes to an appraisal is that me as the agent, if I’m the listing agent and I believe, we listed property at say $500,000 for a reason, like we have some data. When the appraiser’s there, I come with notes, with pages printed out of comparable properties.

Hey, this is how I came up with the value. Now I can’t influence their decision. But I can say hey, here’s a document that I created that shows all the upgrades, when the upgrades were completed, roof, HVAC, plumbing, all of the things that this homeowner did to the property that I feel like impacts the value along with, Hey, these are the comparables that we used.

And when the appraiser’s there, I hand them a packet and say, Hey, listen, this is what I used, and just let them leave with it. That way, if they’re having issues finding comps or doing their job, there’s something to look back on. Now, some could say that’s influencing them. Some might say it’s helping. Some might say it’s hurting.

Whatever the case is, it’s my job to help that value come in, especially when I’m representing the seller in that transaction. As a buyer, a lot of times we’ll do the same thing. If we believe, Hey, we made an offer for X. And this is the reason we’ll bring some data to support that.

And so that’s my job as a real estate agent. Sometimes the listing agents there, sometimes they’re not. It just depends on the situation, but typically the buyer’s not involved in that situation. Now the flip side. Josh mentioned the ability to rebut the appraisal, to ask for a higher value based on comparables.

That’s one option. Typically the more difficult of the two options, in my opinion, is when an appraisal comes in low, getting an appraiser to say I was wrong, this is the value. Right? Nobody wants to admit they’re wrong, especially an appraiser. And they’re now having a real estate agent and/or a mortgage person supersede them.

It’s tough in many ways without some really strong data to support it. The other option, in my opinion, probably the easier of the options is renegotiating to some extent, the value in which the buyer’s willing to pay for that property. Now, over the last couple of years with values going crazy and homes continuing to appreciate more and more, it was, Hey, the appraisal came in less.

If you’re not willing to pay it, buyer one, I got buyer two right [00:18:00] behind you. That’s willing to pay it. You got a pony up or get out. That’s in the conversation. As the market changes and as you go back traditionally and look at this, we go back to our example earlier, the agreed price is $500,000. Appraisal comes in at $475k. 

Me as the buyer’s agent, if I’m representing the buyer is going back to the agent saying, Hey, listen, appraisal didn’t come in. It came in at $475,000. This is where we are. My buyer doesn’t want to pay more than the home is worth and trying to renegotiate that price.

Now we’re going to talk a little bit about renegotiating price when we talk about home inspection here in a minute, but that’s one option. So the seller has a couple of different options in that case. They can say, yes, we agree to lower the price to $475k. They can say no pound sand, or I’m not really willing to negotiate anything at all.

They might give a little bit, come down a little bit and say, we’re willing to split the decision. You come up a little bit, we’re willing to come down a little bit, which in the buyer’s case would mean that they. They’ve got to come in with that difference. You can’t finance that difference in a loan.

So if you agree to a price of $500,000, it comes in at $475k. You’ve got to be able to cover that $25,000 gap somewhere. Means cash out of pocket. You can’t finance that gap. So that’s one of the things that you have to consider when you’re considering waiving an appraisal or renegotiating.

And the other option as a buyer, if the appraisal doesn’t come in, is you have the ability to walk away. Like you don’t have to move forward with that transaction. If the seller’s not willing to negotiate. If the value isn’t there for whatever reason, they’re not willing to work with you, as long as you have that appraisal contingency in place, which is really important, right?

When you’re waving contingencies in a purchase transaction, you’ve got to be careful with what you’re waving and why you’re waving it. A lot of buyers don’t truly understand what that means. In this case, the appraisal doesn’t come in. Seller’s not willing to renegotiate. You have the ability to either pay more and, or back out of the transaction, which would lead you to essentially losing the money that you paid for the appraisal and going out and having to find another property.

Now, with that said, Josh, we talked a little bit about appraisals coming in high, is there really any benefit if I buy a house for $500,000 and the appraisal comes in at $525k. Is there a benefit to me in the purchase transaction where, I’m getting something out of it? 

[00:20:11] Josh Lewis, Certified Mortgage Consultant: Other than a USDA transaction where you can actually finance your closing costs with that higher appraisal, no benefit whatsoever.

It doesn’t impact your debt to income calculation. It doesn’t impact your mortgage insurance requirements in terms of the coverage. Doesn’t impact your loan to value based off of what your down payment is. Cause again, we’re going to be using the lesser of the purchase price or the appraised value. Now the flip side of that, Jeb, you had mentioned, what if this thing comes in low?

If it comes in low, you and the seller agree to split the difference. That really means, okay, we have a new lower sale price, but we still have an appraised value below that. We’re using the lesser of so that lower appraised value versus the sale price. And that is going to calculate your loan to value ratio.

So if you’re putting 5 percent down, you have to put 5 percent down plus the [00:21:00] difference between the appraised value and the new sale price. Or the original sale price if there was no renegotiation downwards. 

So it’s important that your loan officer is well versed in this and can walk you through what those options are and arm you with all of the knowledge and information before you and your realtor decide exactly how you want to handle the negotiations with the seller if there’s an appraisal shortage. 

[00:21:21] Jeb Smith, Huntington Beach Realtor: Before we dive into the home inspection aspect of the differences, one of the things I hear a lot with FHA and VA is the idea that they’re way more strict. You touched on it a little bit to begin with, but I think it’s important to really note are FHA appraisers, are VA appraisers there to kill the deal? Because that is.

Kind of the dialogue that’s out there in the market is that these guys are deal killers. You don’t, once the appraiser goes there, this thing is going to be done. So how does that look from a VA FHA standpoint when it comes to the appraisal? 

[00:21:52] Josh Lewis, Certified Mortgage Consultant: So first off, I am a super advocate for the VA loan program. It is one of the number one benefits veterans earned through their service to the country. The VA specifically wants to see things in the veteran’s favor. So the reason why they have their minimum property requirements is they wanna make sure the veteran doesn’t get stuck with a property that’s a money pit, a problem, an issue. 

But with that being said, if a property doesn’t meet the NPRs and you believe that it’s still a good home for you, and you can make a case to them, you can get a waiver on that. With FHA, it’s more black and white. Their minimal visual inspection says we have to have a heating source in the property. We have to have tested the appliances and they have to work. 

So from that perspective, is it a little bit more stringent in the way it’s written in the guidelines. Yes. What I can say is I cannot think of a time in my head where we had a problem with an FHA appraisal, where we would have solved it by going conventional.

Okay, we were going to do a three and a half percent down FHA. We’re going to do a 3 percent or a 5 percent down conventional. Switch that appraisal to a conventional appraisal and this goes away under the conventional guidelines. For the most part, from an appraiser’s perspective, if they see something in their visual walking through the property, they need to comment on it.

I have a VA right now, Jeb, that actually falls under this. Property is up in semi rural Washington and there’s a barn on the property and the barn is in very poor shape. And under the guidelines, that’s a health and safety issue. So we either have to have a structural engineer say it’s totally safe, which I could show you the pictures and you would say that’s not totally safe or we can demolish it or we can repair it.

So it’s not that it never comes up and never is an issue. I don’t know that it would be all that different in that instance on a conventional appraisal, because any appraiser is going to see that outbuilding. They’re going to see it’s in disrepair and they’re going to see there’s a potential for a health and safety issue. And from their perspective, it truly is a CYA issue. 

They don’t want to not comment on something and have it come back and be a problem for them later. You buy this house, you move into it. The roof of the barn caves in, kills your [00:24:00] cat, kills your kid, whatever, anything, that’s just something no one wants to deal with.

So they are most likely going to call it out as well. So in reality, there’s not much difference. In the guidelines, definitely conventional loans or conventional appraisal guidelines are a little bit less strict because they don’t require that inspection piece of it. But in the real world, I don’t see a whole lot of difference.

[00:24:22] Jeb Smith, Huntington Beach Realtor: Going back, just looking at a deal that we did earlier this year, if it was an FHA deal, FHA appraiser pointed out some peeling paint. It was on the stairs. This was a flip property. And when they flipped it, they didn’t do some of the basic painting. They painted the entire house, but they left like the staircase out front had painted concrete.

That paint started to flake. That was an issue for an FHA appraiser. And that’s a known issue with FHA appraisals, quite frankly, is that you can’t have peeling paint. The second piece of that puzzle is that there were some trees in the backyard that were growing into the power lines.

And from an FHA standpoint, that was a health and safety issue, and so they wanted both of those issues resolved. And so anybody with common sense on the listing agent side is going to say, these are issues. We’ve got to address them. And typically it’s an easy negotiation in that case. Hey, yeah, okay, we see it. It’s a problem. We’re willing to do it. 

Would that have been called out in a conventional appraisal? Maybe not. The peeling paint probably not. But 

[00:25:16] Josh Lewis, Certified Mortgage Consultant: that’s what I was going to say. Jeb you brought up the best example ever. Because of those two issues. Conventional appraiser absolutely would have called out the trees in the power lines. And they 99 percent would not have said anything about the chipping paint. Cause it’s really an FHA/VA issue where they obsess about the chipping paint on a pre 1978 home. 

If that home had been built in 1990, after lead based paint had been eliminated, not an issue. So you picked the perfect example for that, because you did find the one thing that really is going to be more stringent with an FHA or VA appraisal is the chipping paint. 

[00:25:46] Jeb Smith, Huntington Beach Realtor: And the last example I’ll give you is conventional. Let’s tell you, we haven’t really talked about it like conventional, cause it doesn’t really come up, but back in the day foreclosures were happening back in 2009, 2010. I was selling a lot of them. 

But what would happen is on these properties, we would go in and replace the appliances. We would paint them. We would put new flooring in them. We would replace the appliances so that the property showed nice for any buyer that was interested in it.

What was happening is these appliances were getting stolen. People would come in the house. They knew the house had new appliances, so they would come in. They knew they were vacant. They would break in, they would steal the appliances. What happened was an appraiser would come in and go, you don’t have a stove. You’re missing key items of the kitchen here. We can’t finance this. Like you got to have these items. 

And so those items would have to be replaced in order to essentially have a habitable type of property. So you can have issues with all of them. They’re just not very common. And I think the misconception out there is that these are major issues. 

So Josh, the biggest concern, I think when it comes to the two here is typically the home inspection, right? I’ve seen more deals get killed over a home inspection than anything else when it comes to contingencies. So when you’re buying a property, you’ve got a couple of major contingencies, right?

There’s six or seven, but the major ones are your loan. The ability to finance your property. You’ve got the appraisal, which [00:27:00] we just talked about, and you got the home inspection. Those three are the biggest three, in my opinion. They can all be big, but the three biggest and can create the most havoc when doing a transaction with the third one that I mentioned, the home inspection being the biggest one.

And the home inspection is different than the appraisal in that the inspector isn’t there to look at the value. The home inspector doesn’t care about the value of the property. The home inspector is there to make sure that things work in the property. 

Now this is another thing that you’re going to pay as a home buyer out of pocket. Now, Josh typically deals with the appraisal. I typically deal with the home inspection because I’m dealing with the buyer. And so, listing agent side, buyer’s agent side, it’s all the same. But what’s going to happen is an inspector is going to do the inspection on that property. Something you’re going to pay out of pocket. It’s done during that contingency period. 

Now, what happens is you waive an inspection. You waive an appraisal. Can you still do them? Yes. You can still do them. Even though they’ve been waived. You just can’t use whatever comes up in those inspections to renegotiate, to cancel a transaction. So in the world in which you waive the home inspection to make your deal look more attractive on paper to the seller. It doesn’t mean you can’t do a home inspection.

It just means, Hey, if something comes up and I’ve got a major issue here, I can’t say this major issue is the reason I’m backing out. Okay. I think it’s dumb. I think it’s really dumb as a buyer to go into a transaction without any contingencies. I’ll say that first and foremost. 

Have I had buyers do it? I have. But it is a conversation in explaining the repercussions of what could happen if something comes up. You essentially could forfeit your deposit. You could lose your entire deposit. Now in some States part of your deposit is non refundable to begin with, but here in California, that contingency period gives you the ability to not put your deposit at risk until you’ve released all of these things. 

So by waiving all of these things up front, your deposit, is more or less at risk from day one. Home inspection is one of those things where things come up. Okay. It doesn’t matter if the property is brand new, new construction, or been there 50, a hundred years. 

A home inspector is paid to find issues. And I can say it from a listing agent, buyers agent, who’s done a lot of these, even on new construction, they find problems. It could be an outlet that’s not working properly, something that’s not grounded. But what the inspector is there to do, Josh, as you know, is to look at everything.

They’re there to look at the plumbing. They’re there to look at the electrical. Some home inspectors look at the sprinkler systems outside. Some don’t. Some look at pools and jacuzzis. They’re there for everything, but the major systems of the house are typically what you’re looking at, right?

You’re looking at HVAC. You’re looking at the water heater. You’re looking at the appliances in the property, all the outlets, the electrical panel. If it has solar panels. Like a lot of these things are what the inspector is there to take a look at. Now, what the inspector can’t do is they can’t open up the walls in most cases. Unless the walls open, they can’t see behind those walls.

So if there’s something that’s going mold, something that’s non visible, unable to [00:30:00] inspect, it’s going to be very difficult for the home inspector to find it. In the case that it’s an outlet that’s not working, something that’s not grounded, there’s termites, there’s wood damage, there’s some cracks in, in the exterior of the property. That is more visual and an inspector should find that. 

But the inspector isn’t always a hundred percent going to find every problem in a house. And I would say from experience, Josh, that most things in 20 years of selling real estate are cosmetic. They’re code changes over time. Hey, the stair railing going up the stairs should be four inches based on today’s code.

Well this house was built in 1975. They didn’t know that back then. They didn’t know a kid could stick their head in there and get it stuck. That sort of thing, right? So codes change over time and therefore, the home inspector’s job is to know those codes and point them out. But that doesn’t necessarily mean there’s something wrong with the house it just means that these things have changed from when they were initially put into where they are now. So, that said, Josh, I could go on and continue to talk about this, but hearing from my side what are your thoughts or questions? 

[00:31:03] Josh Lewis, Certified Mortgage Consultant: Tell us this. You would talk about an appraisal. I order the appraisal. I don’t go out on the appraisal. So one of the agents generally meets and you said 20 minutes in out, take some measurements, snaps and pictures and move on. This doesn’t sound like a 20 minute appointment. 

Walk us through what that looks like in terms of how long they’re there. What are they doing? You went through the things that they’re inspecting, but just give us a little idea from a buyer’s perspective, what is being done at that inspection and should they be there and should they be there the entire time? 

[00:31:33] Jeb Smith, Huntington Beach Realtor: Yeah. So, you have that contingency period in the contract. So that’s when you’re performing this inspection. My job as the buyer’s agent is to get that home inspection done as quickly as possible. For the reason that I feel like it is the one thing that you’re probably going to do some negotiating on in many cases, but it’s the one thing that can kill a deal where the point where hey, I found that I’m not moving forward with this transaction because of X. Right. 

And so we want to get it done as quickly as possible. So if you’re buying a home, 30 day escrow, the way the contracts written in California is you’ve got 17 days to do your inspection. Well we’re trying to order that inspection as soon as you go under contract.

So within the first week, we’re really trying to get that inspection done. Now, what happens is who’s there? Typically the buyer’s agent is there, or somebody from the buyer’s agent’s team is there while the inspector is doing their inspection. Listing agent, a lot of times isn’t there. Sometimes they are, sometimes they’re not. The seller’s typically not there.

But you as a buyer can be there during the inspection. I tell buyers all the time, this is a good time to see the property in detail, kind of walk through it. So, we talk all the time. People buy emotionally, they justify logically. So a lot of times people go into an open house, see a house, the music’s going, the vibes good, everything’s going, the water’s flowing in the backyard because there’s a street back there and they didn’t want you to pay attention to that.

So everything is shown in its best light, all the lights are on, everything is dialed in. You know, you get emotionally attached, you make an offer. The inspection is a good time to go back when maybe all of those things aren’t there. Turn off all the [00:33:00] lights, turn off the fountain in the backyard, turn off the music and see what it’s really like.

Walk around the property, look at things in detail. Right. Look at the baseboards. Look at the ceiling. Look at all these things. Because the inspector is there, but the inspector isn’t there to do visual things and emotional things. Those are things that you have to go through, right? They’re not going to point out, Hey, there’s a small pinhole in the wall from a painting. Most of them aren’t right. That’s for you to see and walk through. 

So I feel like it’s a good time to do that. It’s a good time to measure, make sure your furniture is going to fit, make sure you know the rooms are what you thought they were and just be there. An inspection, depending on the size of the property, could take anywhere from an hour to couple of hours.

You know, if it’s a small little condo, less than a thousand square feet you’re probably looking at just over an hour. If it’s a 2000-2500 square foot home, you’re probably looking at two, two and a half hours. If it’s a 5000 square foot mansion it might be six, seven hours, depending on how in depth that inspector is and what you’re paying them to inspect.

So typically there’s a home inspection that you’re paying for. That’s a basic inspection, but most appraisers have additional options. You can get a mold inspection. If you feel like maybe you have Issue with mold. And you just want an inspection to begin with. You can have a sewer inspection where they check the sewer lines, make sure there’s no roots or anything growing into them, make sure everything is flowing properly through, through the plumbing, that sort of, so there’s some add ons that you can do in inspections and depending on what you add on or not add on can determine how long that appraisal is.

The way my inspector were, or I’m sorry, I said appraisal. I’m at home inspection. The way my inspector works is that during a two hour inspection, what I tell buyers is, Hey, show up for the last 30 minutes. Let the inspector be there. You can be there the whole time. The inspector is not likely going to be talking to you. He’s just going to be doing his job or her doing her job. 

And then last 30 minutes or so, it’s a good time to do the things that we talked about. And then typically what happens or the way my inspectors have always worked in the past is there at the end that inspector is going to go through everything they found. Hey, the dishwasher is not working properly, or Hey this outlet has reverse polarity and it needs to be adjusted, or there’s no GFIs in the kitchen and that’s a health and safety violation, that sort of thing.

They’re going to walk you through it. Some inspectors will walk you through each thing they found. Some inspectors will just go over it and Hey, if you have a question about what I’m telling you, we’ll go take a look at that thing. And then depending on how they work, you might leave that inspection with the actual report, or it might be given to you in an email within a couple of hours or a day or two.

And from that point, it’s up to you and me as your agent, if I’m your agent to go over those things. Not right then, give it a couple of days to sink in, give it a couple of days to process what you saw, talk to your spouse, talk to your family, talk to whoever, and determine what’s a concern for you.

You might be a handy person and you’re like, none of that bothers me. I don’t really care about any of that stuff. I can fix the outlet. I can fix the plumbing, the dishwasher. I can replace it. I don’t care about any of that. I’m ready to move forward. No negotiation. 

In other cases, you might be somebody that is not handy at [00:36:00] all. You can be like Josh, need to hire somebody for everything and say, Hey, I can’t do any of this, right? I want you to hire a licensed professional to do them. And then from that point, they have the ability to renegotiate, right? Getting under contract is negotiation number one. Right? Just getting your offer accepted is negotiation number one.

Negotiations, two, three, four happen when something’s comes up in appraisal, or something comes up in the home inspection and you want repairs, you want a credit, you want something done that benefits you for the things that you have a problem with in that property. And then the seller can respond in a lot of different ways.

They can say yes. They can say no. They can say we’ll do this. We won’t do that. But just because somebody says, no, doesn’t mean the deal dies. That’s a belief out there that, Hey, I don’t want to ask for anything because I really want this property and I don’t want the deal to fall apart. That’s okay. You can still ask for things and the seller can come back and say no to all of them. And you can still say, okay. That’s okay. I’ll still move forward. 

Or you can go, okay, you won’t say yes to all of those, but how about this? And go back. It’s a negotiation. Sometimes it takes two or three times to go back and forth. Sometimes it’s once, right? So that is how the two primarily differ from one another.

But Josh, listening to that what did we miss?

[00:37:17] Josh Lewis, Certified Mortgage Consultant: Just doubling down on the last piece you said there, if you don’t ask the answer is always no. So ask, the worst case scenario when you ask is no. The only potential if you don’t ask is no. 

[00:37:28] Jeb Smith, Huntington Beach Realtor: But, Josh what I would say with that is be reasonable. That’s tough. Right. What is reasonable? What I would say is, if an inspection comes back and it’s 10 pages long, which they can be, and a lot of it can be nitpicky stuff. If you as a buyer go back to a seller and say, I want everything fixed. A lot of times the seller is going to look at you like you’re crazy. Like, No. It’s focus on the big things. Focus on the high ticket stuff. 

[00:37:50] Josh Lewis, Certified Mortgage Consultant: This was a big question that I had for you. Have you ever seen a perfect home inspection where the report comes back and it says, there’s nothing wrong anywhere?

[00:37:58] Jeb Smith, Huntington Beach Realtor: Never. No. 

[00:38:00] Josh Lewis, Certified Mortgage Consultant: So is that a misconception where you have buyers are like, Oh my God, I didn’t know there’s all these things wrong with the property. And it may be a very clean inspection with three or four items. And they go, Oh my God, there’s three or four things wrong with this house. That’s what, as a seller, we’ve talked on the show where I flipped a number of houses and all of our buyers would always want a home inspection. And some of them would come back.

Oh my God, I had no, you’re like. This is a beautiful home inspection. What are you talking about? We’ll fix those items for you, but that is totally normal. So that to me is the biggest misconception. How do you handle that? And how do you walk through what is significant and major?

Cause as you said, beauty is in the eye of the beholder. The buyer is going to determine what really is major and what they want to ask. But from your perspective, when you’re guiding and advising a buyer, how do you go through what is major and significant? And what is maybe we can overlook this?

[00:38:47] Jeb Smith, Huntington Beach Realtor: It depends on the agent, right? So the agent should be prepping buyers in this thing and having the conversation like, Hey, listen, there’s things that are gonna come up. I, as a buyer’s agent, when I walk through a property with a buyer, i’m pointing out a lot of stuff, right? We’re already looking at the [00:39:00] HVAC. We’re looking at the water heater. We’re looking at some of the things of the property that I think are going to come up in the inspection and i’m telling them Hey, listen, this is going to come up in the inspection. So they already have an idea Of okay the property is not perfect. Jeb pointed out these things during the process.

So we know, right, it’s prepping people. It’s providing some transparency as to how this process works, because if you don’t, like you said, buyers get overwhelmed. And my job is to take some of the emotion out of it and think from a more logical standpoint in, Hey, listen, property’s 50 years old.

You’re going to have issues, what is a concern for you, and talk about some of those things, talk through them. Hey, replacing an outlet, not a big deal. Like the fact that there’s no GFIs in the kitchen. Okay, health and safety says they should replace them and that’s great. But if they just give you a credit and they’re willing to give you a large amount of credit, chances are you can go find somebody to do this stuff for less money.

So it’s help walking through people in a logical way as much as possible. Cause it’s not always logical as to the extent of some of these things. Now, like I said earlier, some people are very handy and they don’t care about anything. Other people are not and want everything done. I mean, I bought my house 11 years ago, Josh, there’s still things that showed up in that original home inspection that are not addressed as of today.

You know why? Because I don’t care. I don’t care that the rubber that goes around the bottom of the garage that connects with the floor isn’t perfect. It doesn’t matter to me. I could do it. I don’t care to do it. 

[00:40:23] Josh Lewis, Certified Mortgage Consultant: Did it matter to your buyer? 

[00:40:24] Jeb Smith, Huntington Beach Realtor: It did not. I’ve got a buyer right now on my property where he’s asking for some basic things and we’re doing some basic things. But there’s a lot of things in the property that came up and he said I don’t care about that. Like I can deal with it when I get in there.

And I think when I say be reasonable, come from the standpoint, hey, if you are the seller and you’ve been living in the property for 10 years, like myself, and you see something that is not working properly, that I’ve known that’s not working properly is that something you asked for? Is that something you not? I don’t know.

But I look at it and say put yourself in the seller’s shoes. If a buyer came and asked you for this, how would you respond? If they ask you for 10 pages of stuff to be fixed, you’re probably going to be a little irritated, a little pissed, quite frankly. Whereas if you ask for big ticket stuff, things that cost a lot of money, you’ve got a higher probability of getting things addressed in my opinion.

Focus on the things you really care about because what buyers will often do, Josh is they’ll just put everything in there. What happens in that case is the seller will pick the things that are less expensive and the easiest for them to do. So you asked for 20 things. They’re going to focus on the ones that they can do easily. And so out of the 20, they might be willing to do 15 of them, but those 15 were cheap, inexpensive, a handyman could have done them. They don’t matter at all. So in their eyes are going I did 15 out of 20. That’s pretty good.

Whereas if you just focused on the five that you really cared about and didn’t focus on the other 15, those five getting completed are the high ticket items, the ones that are most expensive and the ones that really matter. Then, you’re in a better position in my opinion, but it’s all negotiation.

Everything is a negotiation. So when you’re doing this, [00:42:00] You got to find a real estate agent that has experience, that has been through this, that knows what the process looks like, because a really good example. I know we’re getting long on this, Josh. I had a property I sold earlier this year in Lakewood, buyer’s agent came to me and long and short of the story is that gas meters were on one side of the house that had a zero lot line.

So they were on the side of the house where there was a neighbor and there was a fence put up where you couldn’t access your own gas lines. Okay. The seller had been there for 50 years. They knew the neighbor and if they had a problem, they would just say, Hey, can we get over there and deal with the gas lines? Sure. Go over there. 

The buyer’s agent came to me and said, we want $25,000 to fix the fence line and do all of this stuff. We said go pound sand. We’re not doing this. We had multiple offers on this deal, whatever. You know what the buyer’s agent did? They just accepted it.

They didn’t even come back and ask for maybe $2000, $3000, something else. We would have probably given them something to keep the deal together. They did nothing. That to me is inexperience in negotiating by going all the way one way. And then getting us saying no and not even coming back. So make sure you’re working with a professional in this market, because, it makes a difference. It can impact the bottom line.

[00:43:13] Josh Lewis, Certified Mortgage Consultant: On both sides of it. You are right to say that of the two, an expert realtor in, in handling the negotiations, both with you and with the other side, of knowing and helping and guiding and advising what is important on this list of items on the inspection. But on the loan side, it is important that if that thing comes in low or there’s repairs that you’re dealing with a lender that knows how to rebut an appraisal, knows how to do it in a cool way and knows how to do it in an authoritative and accurate way with data that will allow the appraiser to hopefully see it in your favor.

But both of them are pretty straightforward. And it’s just a matter of ask the questions that you have and go through it with your professionals who can guide and advise and answer, in specifics, what we just went through in the last 40 minutes in general.

[00:44:00] Jeb Smith, Huntington Beach Realtor: And Josh and I thought we could keep this episode to 20 minutes or less, and we’re going on 45 minutes in this episode. So we covered a lot of ground here. I’m sure there’s some things that we brushed over that weren’t explained in a lot of detail. So if you have additional questions, always feel free to reach out to Josh and I. Happy to address them, happy to guide you in the right direction.

If you need a real estate agent, like we, mentioned that understands negotiating, you need a mortgage lender that understands the appraisal process can guide you through that process, there’s a link in the description below that connects you with somebody. It’s always a really good resource if you’re new to the home buying process and looking for an expert.

But with that said, I think we’re going to leave it here, Josh, in explaining the differences. But we are available if there are additional questions, but until next time, Buy Right, Borrow Smart, Build Wealth. 


[00:44:46] Josh Lewis, Certified Mortgage Consultant: Amigos.

Thanks for listening to The Educated Homebuyer. Want to connect with us or to a local expert in your area? Please reach out at TheEducatedHomebuyer.com/expert . [00:45:00]

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