Home Inspections
Home inspections are a very wise investment and should be considered on any purchase you are seriously considering.
They can point out any current or potential issues in your new home. Along with a written detailed report you will also get rough estimates of the cost of repairing any issues that are uncovered.
The estimated cost of a home inspection is between $400 to $600 plus travel costs if the home is located outside a major city.
It normally takes about 4 to 6 hours to complete a detailed inspection. The inspector normally requires 24 to 48 hours to complete the written report.
If issues are uncovered and are costly to repair, you may want to consider finding a different home or asking for some of the costs to be covered or completed before your possession. Just because you ask, it doesn’t mean the seller has to accept your offer.
If the costs are less than $1000 most people will consider this as normal wear and tear and this will not be considered a new negotiation on the price.
Major issues may be discussed but the seller is not obligated to renegotiate the price or continue with the sale of the house. If you can’t come to an agreement the deal may collapse.
The majority of inspections will uncover regular maintenance items or minor issues. It is always a good idea to review and consider them.
The report also acts as a guideline to things you will need to take care of in the first year of ownership.
Home Inspections are a good investment
This is money well spent on any home 2 years or older and should be considered and budgeted for. They can save you money and headaches in the long term. Older homes have future maintenance cost this is a fact of homeownership and must be understood. The home inspection can provide a good roadmap to the issues that you will face in the future.
Appraisals
Appraisals are normally required to establish the value of the home you are buying. They are normally ordered by the lender or your mortgage broker. Always consult them before ordering an appraisal
High Ratios Appraisals
When putting down less than 20% the lender will insure the mortgage. That premium will be your expense. It can be paid up front at the closing time and on the possession date or you can have it added to the mortgage and pay it over time with the principle and interest on the regular mortgage payment.
When a mortgage is insured the insurance company will perform their own appraisal normally at their own expense. The insurer may use an automated system that establishes a value on the property from past records and current market conditions.
Conventional Appraisals
When putting down more than 20% for your down payment most lenders will require a 3rd party appraisal done by one of their approved appraisal firms.
This is normally ordered by the lender or the mortgage broker you are using. You will be charged between $300 to $500 plus travel costs depending on where your new home is located.
What is involved in an appraisal?
Appraisals can be in the form of a complete property inspection and market comparison of recent sales with the same characteristics as your new home.
The appraiser looks at the size of the home and the number of bedrooms and bathrooms and if the basement is developed.
The look at the finishing’s of the house and added features such as garages, landscaping and appliances such as hot tubs, saunas, pools etc.
The appraiser takes into consideration the current condition of the house and any major issues that could need repair soon.
Appraisals compare recent sales in the neighborhood.
Recent sales in the same area around your new home will help establish a baseline for the appraiser to begin estimating the value of the home. Lots of recent sales make it easy for them to establish the value.
Few recent sales make it difficult to establish the value and the appraiser may have to venture further out from your area to find properties with similar comparable features to use for their appraisals.
The appraiser uses all this information to establish a price
Using everything they have collected the appraiser will prepare a report that is normally 8 to 15 pages long. It will detail everything they measured and noted and will take the 3 to 5 best comparables found and use them to establish their professional opinion of the home value.
Take Note: Appraisals are not the actual final value of the home.
Appraisals are an estimated market value. You may be paying more or less than this value depending on the current market conditions in your area.
You could be faced with a situation where there are multiple people trying to buy the property so the market price may edge up and this means you pay more.
What if the appraisal comes in lower than you’re agreed on price?
Things become interesting in this situation. You can try to negotiate the price once again with the seller. You can cancel the deal if this is done as a term or conditions of the purchase offer.
If you are in a competitive offer situation you may not be able to make an appraisal a term or condition. I never recommend doing this with a conventional deal. As you could be in for a costly error if the value comes in lower than you’re agreed on price.
If the appraisal is lower, you could be faced with having to make up the difference from the purchase price to the appraised price in cash in order to close your deal.
This means you have to come up with more money to close the deal. The lender will only lend on the appraised value of the home.
If you bought a house for $300,000 and the appraisal came in at $285,000 this means you must make up the $15,000 shortfall as the lender now will only lend based on the $285,000 price valuation.
You may be putting down a large down payment and could adjust the price but if the deal is high ratio and the value comes in lower you may have a hard time coming up with the difference.
Appraisals are critical to the lender so ensure you have one.
This is easy if you are putting down less that 20% as the lender will insure the mortgage and they will want some type of appraisal done to establish value.
If you are putting down 20% or more it is essential you get an appraisal done before removing your financing conditions. Not doing this can be a costly mistake.
Remember: you do not order your own appraisal
The lender will recommend appraisers that they will allow to be used. Normally they will make the arrangement.
What types of appraisals are there?
1) Automated value systems: CMHC and some lenders have software programs that take into consideration all the features of a home and the area they are in to establish a high and low value. If your home fits in this value range the house is automatically approved and the insurer will issue an approval based on this value.
2) The Drive by appraisal: Not as bad as it sounds. The lender will send out an appraiser to drive by the property, maybe take some pictures and review the neighborhood. They will than prepare a regular market evaluation to establish the price.
3) Full 3rd party Review: The lender or insurer will have a 3rd party do a physical inspection of the property. The appraiser will measure and review all details, taking pictures of the house and surrounding areas. They will also take pictures of the comparables for the report.
Each insurer or lender may or may not require an appraisal but you have the option to get one done if you like.
Remember Appraisals are a good investment
Don’t be afraid to request one and always get them when you are putting down 20% or more. The cost is worth every penny along with piece of mind knowing you are not paying too much for your new home.