If you've ever been confused over the difference between a home inspection and home appraisal, you're not alone.

I've been asked questions on this topic from both first-time buyers and experienced sellers alike.

And since most purchase contracts include both of them, I thought I would help explain the difference between the two.

The Basics

The Example

For a more in-depth look, let's examine how these stages play out for Sam and Diane.

Sam is selling his home. Diane is buying it.

In the purchase contract, they agreed Diane would have 10 days (starting on the date of the accepted contract) to perform any inspections and tests she deemed necessary.

They also agreed that, because it was a condition of her loan, the contract was contingent upon a successful appraisal.

INSPECTION PERIOD

After doing some online research and asking for references from her friends, family, and Realtor, Diane contacts ABC Home Inspections and sets an appointment. She also asks ABC to do a pest inspection and radon inspection but ABC explains that since they don't actually test for pests or radon, they will do the home inspection while another company will do the specialty inspections. They offer to assist her in scheduling with the other companies.

On the day of inspection, Diane arrives to meet the inspector because her Realtor has advised her that attending and asking questions is a very good idea.

The inspection lasts a few hours as her inspector checks the foundation, roof, HVAC, plumbing, electrical, chimney, appliances, patio/deck, floors, ceilings, attic, and more.

After the inspection, ABC sends Diane a full report (usually with photos) of their findings. She also receives the results of the pest and radon inspections. Diane shares these reports with her Realtor and they discuss her options.

Diane options boil down to:

1. Waiving the repair request if she is satisfied with the results.
2. Terminating the contract if she feels there are material problems she is not comfortable with.
3. Submitting a Request to Remedy and asking Sam to repair certain items.

She decides to submit a Request to Remedy and her Realtor advises her that it must be presented to Sam on or before the end of the allotted 10-day Inspection Period.

At this time (because the contract also had an agreement for a 3-day Agreement to Remedy Period) they now have an additional 3 days to negotiate the repairs.

They do... and we move forward.

APPRAISAL

Now that they have completed the Inspection and Remedy Periods, Diane and her Realtor inform her lender that if he has not already ordered the appraisal, he should do so at this time.

To ensure an unbiased result, the lender will randomly request that an appraiser completes a report on the home. This is not an appointment that Diane will attend.

Once the appraiser views the home in person, checks comparable sales in the area, and completes her report, she submits her findings to the lender.

If everything checks out okay, the transaction keeps moving.

But in this case, the final appraised value came in $5,000 below the agreed-upon purchase price.

This means that if Diane still wants to proceed, she and Sam need to come to a new agreement.

Their options include:

1. Keeping the purchase price the same, but Diane's loan amount decreases by $5,000. This means she will bring an additional $5,000 of personal funds on the day of closing
2. Reducing the purchase price by $5,000. This means Sam will receive less money on the day of closing.
3. They can meet in the middle.
4. Diane can terminate the contract.

Sam and Diane agree to "meet in the middle"; the purchase price will be reduced by $3,000 and Diane will bring an additional $2,000 in funds to cover the rest at closing.

This brings an end to their appraisal contingency... and Sam and Diane move on to a successful closing day.

The Recap

To recap the main differences between inspections and appraisals:

1. Inspections are highly recommended but not required; appraisals are required.
2. The Buyer sets up the inspection; the lender orders the appraisal.
3. Inspections are paid at the time of service; appraisals are typically paid at closing. Both are paid by the Buyer.
4. Buyers are encouraged to walk through the home with the inspector; appraisals are typically done alone.
5. Inspections examine the physical condition of the home; appraisals determine the value of the home.
6. Inspectors have ways of spotting deeper issues in the home; appraisers only see things visible to the naked eye. 
7. Inspectors and appraisers have different skills and are trained and certified in different areas.

As you can see, while they use different methods and report to different people, both inspections and appraisals are an important part of protecting your investment.