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Escrow: Home Inspection and Appraisal Process

Once your home is ready to be put on the market and you've decided to accept a fair offer price, it's finally time to proceed with the escrow process and get your property sold! Assuming that you've already made all necessary repairs, the first step in closing the deal will be to carry out a home inspection and appraisal.

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These two processes are essential for buyers to complete their investment with full peace of mind, as it will give them insights into both the fair market value of the home and the current condition of the home. Buying a property for any purpose, be it residential or investment-centered, is an important financial decision after all, so sellers should do their best to accommodate their prospective buyers and be as forthcoming as possible when it comes to disclosing any pre-existing issues with the property.

In preparing for listing and selling the home you might have already prepared disclosure documents detailing all potential issues with the property, including any health hazards and neighborhood nuisance issues. Carrying out a home inspection and appraisal process will only solidify your rapport with the buyer, as well as confirm that they are making a good investment by choosing your home!

So, how can you prepare for the home inspector to come around, and what's the difference between an inspection report and an appraisal? Here's all you need to know for a smooth home purchase!

What's the difference between inspections and appraisals?

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First things first, let's take a closer look at what both an appraisal and an inspection process entail. Contrary to popular belief, they are not one and the same. Home inspections are thorough examinations of the property's overall condition prior to the sale, including roof problems, electrical issues, AC, plumbing, and water issues. This examination is carried out by home inspectors hired by the buyer to assess any current problems with the home, but other potential issues like mold and pest infestations are usually not covered, requiring buyers to hire more specialized professionals.

In most cases, your real estate agent will already have advised you on what repairs to carry out before accepting an offer, as well as what less important fixes to avoid. Appraisals, on the other hand, are designed to determine the estimated market value of the home, taking into account the location of the property, its current condition, and the value of comparable properties in the same area.

Almost all mortgage loan companies require appraisals before they can go ahead and lend the buyer what they need, as lenders can generally only lend up to 97% of the home's appraised value and stand to lose the most out of a bad deal. According to U.S. law, this service can only be carried out by a licensed, neutral third party hired by the lender, but it's the buyer that will usually take care of all closing costs related to a real estate appraisal.

How do home inspections and appraisals affect sellers?

So, while both services are designed to assess the state of the property, they have very different purposes equally important for the home-buying process. But how do these procedures affect sellers and what can you do to prepare for them as much as possible? Appraisals can be a stressful time for both sellers and buyers, as assessing the market value of the property in question is what mortgage loans and home prices depend on. It is quite rare for an appraised property value to be low, which is what happens when the appraised value is determined to be lower than the offer price. That can still happen on occasion and especially in a seller's market where there aren't enough homes available to effectively satisfy demand.

When low appraisals happen, buyers might have to cover the difference out of pocket to appease their lender or, if they're unable to, they might have to renegotiate the purchase price with the seller or be forced to walk out of the deal altogether. Needless to say, low appraisals are bad news for sellers too, as the last thing you want after spending time and money on getting your home ready for a sale is to negotiate a lower price or stop the process in its tracks and go back to the very start! When it comes to home inspections, on the other hand, sellers should be aware that failing an inspection checklist might mean they'll have to either carry out more repairs themselves or go back to the negotiating table to settle a new fair price for the property.

Failing an inspection report might also mean that your buyer might walk out of the deal altogether. Keep in mind that, unlike appraisals, home inspections are not necessarily required by law, so your buyer might not even want to go through with one if they wish to appeal more to sellers. In this case, you will discuss a home inspection waiver alongside the initial offer. Whatever example may apply to your situation, just make sure to keep the lines of communication open and discuss all contingencies with your real estate agent!

The road to closing, step-by-step

Prepearing a house for sale

So, how can you make sure you're fully prepared for both an appraisal and an inspection? And what other steps will you need to take on your way to finally close the deal and sell your home? Here's what you can expect on your journey to closing.

Preparing for your appraisal

The lender's appraisal process is one of the most common reasons why real estate transactions fall apart, so being prepared for what's to come as a seller is fundamental. Needless to say, making sure the entire home is in tip-top condition, curb to basement, is the easiest way of making the appraiser's visit go smoothly. You'll want to invest time in some deep cleaning or even professional cleaning right before the appraisal, and even invest in professional staging to really showcase the best that your home has to offer.

Make sure to get rid of all clutter and allow easy access to all areas of the house, so you can make the visit quicker and smoother and not waste any of the appraiser's precious time! Depending on the condition of the home, your agent might have already suggested a prior appraisal to determine a fair market value for your home and ensure that all the necessary repairs have been made. So, if you decide to shoulder the costs of an independent appraisal before the mortgage lender sets up one for your buyer, you will already know what to expect in advance and can prepare for any major issues, decreasing the risk of your deal falling through!

Preparing for a real estate inspection

While not legally required, most buyers will also have the property inspected by a licensed property inspector within the time frame that was agreed upon in the effective contract to purchase. If you've been working with an experienced realtor by your side, chances are you are already prepared for what's to come, as they likely would have already suggested carrying out key inspections prior to accepting an offer from a buyer.

It might be a costly addition to your sale budget, but just like with setting up a prior appraisal, having a licensed home inspector assess your home will still save you money if the deal happens to fall through! If you do end up going through with the buyer's home inspection, keep in mind that some buyers will also have several different inspectors come to assess the property if they want a different professional opinion for different areas. For example, you might have one home inspector come around to review your AC system, one for plumbing issues, and another for mold and pests. To prepare for all these different assessments, make sure you provide open access to all areas and check the entire house for minor issues you can address yourself, such as faulty doors and windows, leaky faucets, running toilets, and even light bulbs that need replacing.

Working with the closing agent

Once you have passed the home inspection and appraisal stage, you'll get to work with either a title company, an escrow agent, or an attorney selected by your buyer as the closing agent, whose job is to examine and insure clear title to real estate. After researching the complete recorded history of your property, they will first certify that your title is free and clear of encumbrances (such as mortgages, leases, or restrictions) by the date of closing and that all new encumbrances are duly included in the title. The closing agent will essentially act as an intermediary between the buyer and the seller throughout the last few stages of the sale, ensuring that the transaction process is transparent and secure.

Planning for contingencies

The journey is almost over, but before you can complete the transaction, your buyer will have to review all the information gathered over the course of the real estate appraisal and home inspection to see if the property meets all the pre-agreed conditions for sale. These conditions are also called contingencies, and they must be met before a contract becomes legally binding. For instance, a buyer will usually include a contingency stating that their contract is binding only when there is a satisfactory home inspection report from a qualified inspector. So, before completing the purchase of your property, the buyer will go over every aspect of the property and review what conditions have been met on both ends,  including whether they have obtained the necessary financing and insurance and whether your property fits the necessary appraisal and inspection criteria.

They will also review all pertinent documents to spot errors or oversights, such as preliminary title reports and the disclosure documents your agent has provided prior to the appraisals and inspections. As always, your real estate professional will be with you every step of the way to protect your interests, as this review period is the most crucial part of closing the deal! Depending on the outcome of these inspections, one of two things may happen: Either each milestone is successfully closed and all the contingencies can be removed, or the buyer will request a renegotiation of the terms of contract, which 9 times out of ten will revolve around renegotiating the price for the purchase.

So, how do you respond objectively and fairly to the buyer when a renegotiation is demanded, all while acting in your best interests? Once again, this is when a professional listing agent can make a real difference in the outcome of the transaction. Having dealt with various property sales in the past, our realtors will guarantee top-class expertise and total commitment to every customer, no matter what their situation is!

Loan approval

Following the lender's appraisal, your buyer's loan application will either be approved or rejected, resulting in yet another question mark of the sale process. That's why we suggest that you accept buyers who have a lender’s pre-approval, approval letter, or written loan commitment, which is a much better guarantee of loan approval than a pre-qualification or no documentation at all!

Close of escrow, made simple

Once your home inspection and appraisal are dealt with and you're happy with the state of negotiations, it's finally time to close the deal with your home buyer. The close of escrow process will mostly be carried out on autopilot, but between the stacks of paperwork and final inspections, there are still plenty of "best practices" you should keep in mind to make the whole ordeal easier and stress-free. 

Make sure you have the right agent by your side through it all — get in touch with one of our experienced professionals today to find the right fit for your selling needs!

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