It’s important for potential home buyers and home sellers to understand the costs of inspections and appraisals in Hawaii – after all, they have the potential to either support or cancel out a potential transaction completely.
We’ll cover the differences among the two processes and show you how you can even avoid these costs completely through a direct sale of your Hawaii property.
Always remember that your return, at least financially, is the bottom line. It’s not the raw number you sell or purchase a house for — it’s what is the net result at the end of the day after you’ve accounted for all of your costs, credits, deductions, etc. That’s the key figure, not the sales price stamped on the contract.
Professionals in the real estate industry understand the importance of determining these numbers, but regular folks who may buy or sell a Hawaii property once every 10 years or so don’t always think about this. I often have people tell me ‘This is all Greek to me’ and it’s natural to be that way if it’s not your bread and butter everyday occurrence (it’s a good thing you’re reading this post, right?).
Now, appraisals and inspections are as different as night and day. Both do include reviewing the property in question by licensed professionals in their fields and are done to help everyone make an informed decision about how (or whether) to proceed with the transaction, but with different purposes behind each. Let’s keep going…..
The Appraiser
Simply speaking, mortgage lenders almost universally require an appraisal, which helps to determine what a home is likely to sell for in Hawaii. The home will be the collateral for their loan to you (the mortgage), so naturally, they want to know its present value – makes sense, right?
The appraiser is a third party hired by the lender, meaning that they have no financial interest in the outcome of the appraisal and are supposed to present a valuation of the property. The basic factors used in the process are what you might expect: location, the condition of the home, the size of both the home and lot, and the values of recently sold homes in the neighborhood which are the most similar to the property in question, called comparables or ‘comps’. Other things like ocean views, age of the home, etc. will also be taken into consideration.
So a single family home in Hawaii Kai that’s only 5 years old, has 5 bedrooms on a 10,000 sqft lot and looks out over Makapuu and the Pacific Ocean is going to appraise differently than a home in Aina Haina bulit in the 1970s that could use some repairs, even if it’s also on a 10,000 sqft lot.
The lender will then take the appraiser’s completed report and use the value in determining what type of loan they can offer you. Of course, the value of the home on the appraisal has to be higher than the loan amount requested, and you’ll have to satisfy all of the lender’s qualification requirements.
In the event that the borrower is required to make up any difference between the loan amount requested and what the lender can offer, there are still a few options. The borrower may need to come up with the difference out of their own pocket (or family, friends, etc), negotiate down the overall price with the seller to reduce the loan amount, or cancel outright and try for a less expensive property elsewhere. Now, on the other hand, if the appraisal comes in at a higher amount than the loan amount requested, this difference would be considered as equity in the property – congrats!
So if you’re in contract to buy a house in Pearl City and the appraisal comes in $50,000 less than your purchase contract amount, you might be in a good place to renegotiate…… or it could be time to keep shopping around the islands.
The Inspector
Most people are familiar with home inspections. Inspections can be requested prior to finalizing your transaction, but aren’t usually required by lenders – it’s the prospective home buyer who normally makes this request. A licensed professional will be examining both the current condition of the home as well as digging further into what issues may show up down the road. They will be checking structural and foundational stability, water and sewer issues, roof concerns, as well as plumbing or electrical systems, etc. The inspector will gladly take you along and explain their findings to you as they gather report data (although in today’s Covid-19 situation, this will probably be done via Facetime or Zoom).
Buyers and sellers can then expect that once they’ve received this final report, it may be required to renegotiate the pricing or negotiate who will be responsible for the repairs and any costs involved.
The Final Word
The main point to remember is that appraisals are based on present value for the purposes of getting a loan, whereas inspections are based on physical concerns and are used for evaluating the purchase decision itself. While lenders will arrange appraisals, however, any inspections must be arranged by the owner of the property.
Your asking price in the market needs to be set right to attract buyers while buyers want to know exactly what they’re getting regarding a home’s condition. As the outcome of these reports have no significance to the third-party independent professional performing them, inspections and appraisals in Hawaii should help buyers and sellers make reasonable, sound real estate decisions.