DEFINITION of Home Inspection

Home inspection is an examination of the condition of a real estate property. This usually takes place in connection with the property's sale. A qualified home inspector can assess the condition of a property's roof, foundation, heating and cooling systems, plumbing, electrical work, water and sewage, along with some fire and safety issues. In addition, the home inspector will look for evidence of insect, water or fire damage or any other issue that may affect the value of the property.

BREAKING DOWN Home Inspection

Potential home buyers often hire home inspectors to research the property and provide them with a written report that details the property's condition, including an assessment of necessary or recommended repairs, maintenance concerns and any other potentially costly issues. A home inspection should not be confused with a home appraisal, which determines the value of the property. (For an appraisal to be valid, the authorized person must have a designation from a regulatory body that governs the jurisdiction of the appraiser. The appraiser can use several valuation methods, including the current market value of similar properties, quality of the property, and a range of valuation models.)

Home Inspection and Real Estate Valuation

Valuing real estate can be a challenging process. The result of a home inspection is just one variable in this process. Investing in real estate is similar investing in stocks. Two basic methodologies exist: absolute value and relative value. Discounting future net operating income (NOI) of a property by the appropriate discount rate is similar to discounted cash flow (DCF) valuations for stock. Integrating the gross income multiplier model in real estate is also comparable to relative value valuations with stocks.

In both methods of real estate valuation, it’s critical to choose an appropriate capitalization rate or the real estate’s required rate of return. This is net of value appreciation or depreciation.

Home Inspection and Mortgages

A mortgage are a key concept in any real estate purchase. Following a home inspection, many buyers will apply to their local commercial bank for a mortgage to help finance the home. Rarely can individuals or couples purchase a home in full; instead, they put a certain amount down at the start and then continue to pay in monthly installments until the mortgage is paid off.

In a residential mortgage, a home buyer pledges his or her house to the bank. The bank then has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.