Appraisers and Home Inspectors
Serve Two Different Purposes
By Charlie Elliott, MAI, SRA

In the real estate appraisal business, there are currently two major trade magazines, excluding Valuation Insights & Perspectives, which is the official magazine for members of the Appraisal Institute. The two trade publications designed for all real estate appraisers, whether they are Appraisal Institute Members or not, are The Communicator and Working RE. Both of these magazines are sent to, not only appraisers, but also home inspectors.

That and the fact that both visit and inspect houses as they perform their respective jobs are just about all, in my opinion, that home inspectors and appraisers have in common. Perhaps, the public has some confusion about the two professions, but I doubt if the readership of this publication, which is geared towards mortgage professionals, does. That’s because you know that appraisers are required on mortgage transactions while home inspectors are not.

Don’t get me wrong. Home inspectors indeed do have a place in our economy. As a matter of fact, I recently hired one myself when I bought a house at the coast. With my background, I probably could have gone through the house and determined what was needed to get it up to snuff. But the house is over 100 years old, and I was extremely busy with other matters, so I was pleased to be able to hire a professional to take a close look at my new investment and give me a list of recommendations.

The home inspector’s sole job is to assess the condition of the property and to make sure all of the components of the property are in working order and to report all findings to the owner on a written report.

My new (but old) house had a lot of defects that the home inspector cited. He found a number of defects, fortunately most of which didn’t cost a whole lot to repair, but things I needed to know about the house so that I could get them taken care of before they became sources requiring major expenses. There were a couple of piers in the foundation beginning to rot and needed to be replaced. He was able to determine that by a device he had that can show that a piece of wood, which may look good on the surface, is actually going bad. This is done by measuring the moisture in the material.

The home inspector will also assess the electrical system and make sure all the outlets work. He’ll make sure the panel box is up to current building code standards. Home inspectors also assess the heating and air conditioning system, the plumbing, the hot water system, the roof and other parts of the house that could be in need of repair or replacement. Some components may not meet current building standards and may be OK as is if they are serviceable, but the buyer, at least, knows of the condition.

The home inspector is hired by the buyer of the house for the buyer’s protection, while the appraiser is hired by the lender of the mortgage loan for the lender’s protection. A home inspection and an appraisal of a house usually tend to cost about the same. A home inspector tends to spend more time inspecting a house than the appraiser does, but the appraiser, of course, spends additional time away from the property researching information such as sales figures of comparable property.

The appraiser might stick his head in the attic or under the house, but generally he won’t crawl into the attic or under the house like a home inspector needs to do in order to complete his job. An exception to this is on FHA appraisals where the appraiser is issued a detailed checklist that requires him to perform more home inspection duties in the course of the appraisal.

But the appraiser’s concern in performing the appraisal is determining the actual value of the house. The appraiser is not concerned so much about every detail of the house or if everything is right. Naturally, if there are major problems, the value of the house is affected, and it would be the appraiser’s job to warn the lender that the collateral may not be worth as much as it may appear to the untrained eye.

As I mentioned in this space a few months back, the real estate appraisal profession has been in existence since the 1930s when inadequate collateral valuation led to the collapse of many financial institutions. It was a self-regulated industry with trade organizations, for all practical purposes, calling the shots until the savings and loan crisis of the 1980s, which led to government licensing of real estate appraisers.

The home inspection industry is not as far advanced in that regard. I remember as recently as 10 or 15 years ago that home inspectors weren’t state regulated, and I didn’t see much in the way of trade organizations they had. If you wanted a home inspection done back then, you might have gotten a contractor to look at it and he didn’t have a standard form. I think the recent growth in popularity and sophistication of the home inspection industry has been aided, at least in part, by the growing use of buyers’ agents in real estate. Home inspectors tend to be former contractors and others involved in the construction trade, while appraisers seem to have a little bit more of an academic background. They seem to enter their profession from a financial and quantitative perspective.

While appraisals are necessary on all mortgage transactions involving government-backed loans, I would say the older the house, the greater the need for the buyer to hire a home inspector. In fact, on a new house with a warrantee, a home inspection would probably not be necessary.

But home inspectors certainly have an important role to play in the real estate industry. While the appraiser, who is working for the lender, can also be of use to the buyer; it is also fair to say that the home inspector, who is working for the buyer can also provide useful information to the lender.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.