Home Inspections are an Appraisal

Regardless of how the Home Inspection Industry characterizes a Home Inspection, for purposes of the home buyer it is an appraisal. The Home Inspection industry takes great care to separate the Home Inspection process from the Appraisal and the Structural Pest Inspection in order to maintain professional boundaries and not infringe on the licensing requirements for the other industries required by the State. The California Business Code identifies a home inspection as a “non-intrusive physical examination, performed for a fee, designed to identify material defects in the systems, structures, and components of a building as they exist at the time of the inspection.” There is no discussion of value in the California Law. It is left up to the buyer to assign value to the “Defective Systems” discovered during the inspection and disclosure process. For the purposes of the Home Buyer, a Home Inspection is an appraisal prior to the close of escrow. What does a first time home buyer expect out of the home buying process? I think we can all agree that they hope to get the best value for their dollar. Also they are afraid of making a poor business decision; but mostly they are afraid of being cheated by the seller or by one of the sales agents. When the buyer’s review process is reduced its essence, the buyer’s are only interested in the home’s value prior to the close of escrow. The buyers try to determine the home actual value by reviewing the documentation provided by the agents. To this end the home buyers gather the various reports provided by the agents, in the mistaken belief these documents were prepared for the buyer’s protection when in fact these reports are designed to limit liability for the agents and sellers. The Home Inspection is one of the few, if not the only disclosure document addressed specifically to the buyer. A secondary use of a Home Inspection is using the reported issues to renegotiate the sales price. Only after the close of escrow does the inspection report take on the accepted role of defect inspection. Home Inspection reports are ultimately used to help determine the value of a property for the buyer. Any argument that Home Inspectors do not assign monetary value is naive. Knowledgeable buyers very quickly come to understand that a Home Inspection provides a basis on which to determine a final value for their purchase. When a report recommends further evaluation and repair of a discovered defect by a qualified specialist along with a recommendation for estimated cost to repair prior to the close of escrow, the Home Inspectors are by de facto assigning value, through the estimated costs of repairs. The adjusted value is always a negative value. It is this negative value that has given the Home Inspection the reputation as a “Deal Killer” where the real responsibility lies with the lender’s appraisal being based on incomplete information. A home inspection is the final step in completing the appraisal process to determine the final value of the home. Buyers have the mistaken belief that the appraisal was prepared for their benefit. While the appraisal is generally accepted as the value of the property it is not the absolute value. Keep in mind, “fair market value,” or “a willing Buyer and a willing Seller” can be the basis of value, but the appraisal industry standards do not acknowledge the importance of disclosing the condition of the property to the appraiser so that the defective issues can be included in the appraised valve. A buyer might not be so “willing” to purchase a property if he knew there was a significant crack in the foundation. Only recently has Buyer was been allowed to have a copy of the appraisal. Recent changes in appraisal law now allow a home buyer a copy of the appraisal if it is requested with in a certain amount of time and in writing. The buyers generally have no idea how the basis of value was determined on their homes; the vast majority of home buyers never see the appraisal, the document on which they make the largest purchase of their lives. The lenders are not concerned with the Home Inspection because the negative value discovered in the report rarely impacts their loan; i.e. no losses to the lender. This negative value can be very important to the home buyer as it represents the net equity in their home. This net equity may represent the difference between a satisfactory homeowner experience and a disastrous homeowner experience. I would summit that an appraisal is the value of a home in its undisclosed condition. A home inspection represents the final process in determining the home’s final actual value for the buyer. Accordingly a home inspection must be an appraisal. A typical residential appraisal is performed for the lender based on guidelines designed to protect the lender. The appraisal and the associated loan have built in margins designed to protect the lender from loss so that the usual issues in the Home Inspection do not impact the lender’s security. In addition, the lender also has the Borrower’s credit as a backup to cover any discrepancies in the Appraisal. Even more protection is provided by the homeowner’s insurance policy that covers lender’s potential losses. The buyer’s are responsible for the loan regardless of any yet to be discovered issues that may arise in the property. If, after the close of escrow the home is found to be infected with mold and has to be vacated the buyer is still obligated for the loan. The buyers are obliged to repair these issues, or at least live with them in order to protect their credit and equity. Do not make the mistake in believing the Appraisal was prepared to protect the Borrower. In my opinion the Home Inspection Reports will become more important to the lenders as their loans approach 100% financing. If these types of loans ever go into foreclosure on a significant scale you will see the lenders become more interested in Home Inspections and require them on high ratio loans in order to protect their investments. If the lenders begin to require Home Inspections then proper regulatory legislation will not be far behind. An Appraiser spends approximately 20 minutes at the subject property reviewing the various components. An Appraiser develops a general knowledge of the property and a specific knowledge of the neighborhood values. A Home Inspector spends up to 5 hours or more at the subject property developing specific knowledge important to the value of the home but has a limited knowledge of the neighborhood conditions. Only by combining the two processes can the Buyer develop a true value of the property. In my opinion the Home Inspection should be performed prior to the appraisal and supplied to the Appraiser so that accurate valves can be assigned. Accordingly the Home Inspection would officially become part of the appraisal process. CALIFORNIA CODES

MONTOYA ACT BUSINESS AND PROFESSIONS CODE SECTION 11422-11423 11422. The office shall, on or before February 1, 1994, and at least annually thereafter, transmit to the appraisal subcommittee specified in subdivision (d) of Section 11302 a roster of persons licensed pursuant to this part. 11423. (a) For purposes of this section: (1) "Applicant" means a person who has made a written request for an extension of credit which is proposed to be secured by real property. The term does not include a guarantor, surety, or other person who will not be directly liable on the loan. (2) "Appraisal" shall have the same meaning as set forth in subdivision (b) of Section 11302. (3) "Residential real property" means real property located in the State of California containing only a one-to-four family residence. (b) A lender in a loan transaction secured by real property shall provide notice as described in this section to a loan applicant of the applicant's right to receive a copy of the appraisal, provided he or she has paid for the appraisal. An applicant's written request for a copy of an appraisal must be received by the lender no later than 90 days after (1) the lender has provided notice of the action taken on the application, including a notice of incompleteness, or (2) the application has been withdrawn. (c) The lender shall mail or deliver a copy of an appraisal within 15 days after receiving a written request from the applicant, or within 15 days after receiving the appraisal, whichever occurs later. (d) Where the loan is proposed to be secured by residential real property, the notice of the applicant's right to a copy of the appraisal as provided in subdivision (b) shall be given in at least 10-point boldface type, as a separate document in a form that the applicant may retain, and no later than 15 days after the lender receives the written application. The notice shall specify that the applicant's request for the appraisal must be in writing and must be received by the lender no later than 90 days after the lender provides notice of the action taken on the application or a notice of incompleteness, or in the case of a withdrawn application, 90 days after the withdrawal. An address to which the request should be sent shall be specified in the notice. Release of the appraisal to the applicant may be conditioned upon payment of the cost of the appraisal. (e) Where the loan is proposed to be secured by nonresidential real property, the notice of the applicant's right to a copy of the appraisal shall be given within 15 days of receiving the appraisal. The notice shall specify that the applicant's request for a copy of the appraisal must be in writing and that the request must be made within the time specified in subdivision (b) and that the applicant is only entitled to receive the appraisal or appraisals obtained by the lender for the purpose of evaluating the applicant's pending request for an extension of credit. Release of the appraisal to the applicant may be conditioned upon payment of the cost of the appraisal and the cost of duplicating the appraisal. (f) Nothing in this section is intended to effect a change in current law in any manner with respect to reliance on an appraisal by anyone other than the lender who released the appraisal. (g) This section does not apply to appraisals obtained by lenders on property owned by the lender, nor to appraisals obtained by the lender in anticipation of modifying any existing loan agreement if the lender has not charged for the appraisal. (h) In the case of loans secured by residential real property, compliance with Regulation B (12 CFR Part 202 et seq.) of the Federal Reserve Board is deemed to be compliance with the provisions of this section and Section 10241.3.
 
Adding a Home Inspection to the appraisal could result in a new classification for an appraisal; i.e. “The Buyer’s Appraisal?” In the real world of California politics this is unlikely to happen. It is interesting to note that the Federal Housing Authority (FHA) has recognized this circumstance with their limited FHA appraisal inspections. The problem with FHA inspections is that the appraisers are not qualified to perform home inspections and the scope of a FHA inspection is inadequate when compared to a proper home inspection according to State law. The home buyers may mistakenly believe they are protected by a FHA inspection when in fact they may they are still subject to yet to be discovered issues. When the Home Inspection assigns de facto value it becomes clear that Home Inspectors have the potential of exerting a tremendous amount of influence over the individual purchase transaction and by extension, the Real Estate Industry in general. Any influence over an industry that controls billions of dollars annually with something like 400,000 members in the California Association of Realtors will definitely be met with opposition. In my opinion home inspection industry is perceived as a threat to the Real Estate Industry. Control of such a valuable resource is not likely to be relinquished without a struggle