Inspections vs. Appraisals vs. AVMs

Inspections, appraisals, and automated valuation models, while related, all have different functions but can be easily confused. Let’s take a closer look.

Regarding the trickle-down valuation process:

The inspection and appraisal eventually will influence how AVMs are calculated. Basically, all home values on the market are determined in a trickle-down process that starts from the inspection process. The results are used in the appraisal value, which can influence the final closing numbers that eventually end up in the public reports where the AVM systems use them to perform market calculations.

Firstly, let’s explore the Home Inspections Process:

A property inspection is ordered by the buyer and is meant to be an unbiased look at the condition of the property. Although 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 a note and provides the buyer with a report.

It’s worth noting that 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.

Now, let’s delve into the Home Appraisal Process:

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, nearby schools, and crime rates. The ultimate goal of the appraisal is to determine the true value of the property for the sake of the lender.

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.

Lastly, we’ll explore the Automated Valuation Model, AVM:

An automated valuation model is a digital evaluation of the value of a home. An AVM will quickly research the database of similar homes in the area and compare them with the value of the subject property. AVMs are often used to assess the value of a property portfolio and have the advantage of saving time and money since no one physically visits the property. However, it’s important to note that AVMs can’t take into account the true condition of a property and often aren’t enough to secure a conventional loan for a home buyer.