Inspections, appraisals, and automated valuation models AVM's are terms we hear thrown around quite a bit. Whether you're a first time buyer or seasoned vet in real estate, there can still be some confusion with these terms.
What's the difference with each one? Who pays for it? And when does it take place in the real estate transaction?
They're all related to a real estate transaction, but all have different purposes and can be easily confused. Let's dive in...
A property inspection is ordered & paid for by the buyer. It's an unbiased look at the condition of the property. The property inspection isn't worried about minor cosmetic blemishes, but more about the livability and safety issues.
While not necessarily required by a lender, an inspection protects the buyer from purchasing a home that requires expensive repairs or otherwise doesn't live up to its list price. A property inspector will examine the condition of the property inside and out, running through a checklist of areas including, but not limited to, the roof, electrical panels, wiring, plumbing, appliances, doors and windows. If any issues pop up, the inspector makes note and provides the buyer with a report.
At this stage, ALL of the inspection issues are negotiable. Sellers aren't required to fix anything, but usually both the seller and the buyer "meet in the middle" with the help of the realtors and attorneys.
Many reported issues will need some attention but won't affect financing. If major repairs are needed however, the lender might want to have those issues addressed before they provide any funding.
Once the inspection has been completed and reviewed, the lender can order an appraisal. The appraisal will consider comparable homes in the area as well as other factors such as lot size, bedrooms, baths, nearby schools and amenities. The goal of the appraisal is to determine the true value of the property for the sake of the lender. The appraisal is paid for by the buyer, and it usually takes place AFTER the home inspection.
The key difference between an inspection and an appraisal is that an inspection aims to assess the physical condition of a home itself, while an appraisal solely determines the market value of the real estate.
An automated valuation model (AVM) is a digital evaluation of the value of a home. You may see these called "Zestimates" on particular home search websites... An AVM will quickly research the database of similar homes in the area and compare them with the value of the subject property. AVM's are often used to give you the quick & dirty value of the property... It can also assess the value of saving time and money since no one physically visits the property.
However, AVM's are problematic if you're selling or buying a home and you want to know what the home is truly worth. Why is that? In many It cases, I've seen AVM's be off by anywhere from 10-30% of the home's actual value, which is pretty crazy! AVM's can't take into account the true condition of a property, or many of the updates that may have been done that add value. IE - updated bathrooms, updated kitchen, outdoor living space, finished basements, etc. AVM's can't take place of an appraisal as they aren't enough to secure a conventional loan for a home buyer.
Do you have questions about buying or selling a home in Lake in the Hills, Huntley, Crystal Lake, Algonquin or the surrounding area? Happy to help answer any questions you have, let's jump on a hassle-free, no pressure call and I can walk you through the process. 312.217.4398 or firstname.lastname@example.org