Is a Refinance Appraisal Different from a Purchase Appraisal?

I recently took a call from a friend of mine who is a Realtor.  She listed a home $20,000 higher than the most recent appraisal – which was completed earlier in the year when the homeowners refinanced their mortgage.  And it just so happened that the same appraiser got the assignment for the new purchase, who did the refi appraisal just months earlier. Her question was, “Isn’t a refinance appraisal different from an appraisal done for a purchase?”

This is a question that actually comes up a lot.  I heard a podcast one time and a Realtor explained it like this:

“Many times homeowners think that the value that they get back from a refinance appraisal is their home’s true value. Most times, this just isn’t the case.  In a refinance appraisal, the bottom line is that the bank wants to lend you money no matter what. Because of this, the refinance appraisal is probably going to come in a little bit higher than a traditional appraisal would. This is important to know because some home sellers see the amount that their house appraised for on the refinance appraisal and expect that it represents the true value of their home. Sometimes this just isn’t true…The refinance appraisal will usually be higher than the other types of appraisals because it is in the bank’s best interest to loan you money and make sure that the property appraises at a high price.”

Now look – I don’t know this person, so what you’re about to read isn’t a personal attack, but this is exactly why if you have a question about appraisals, you should really ask an appraiser.  You know – someone who actually does appraisals.  Ok. I’m off my soapbox now.  Thanks.

So let’s examine the question together, so we can actually get to the truth, shall we?

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Again, my friend’s question was, “Isn’t a refinance appraisal different from an appraisal done for a purchase?”

Well, the short answer is, “not really.”  If the refinance appraisal was a full appraisal with an interior inspection, and the purchase appraisal is the same, then there are really only two minor differences between the two.  I’ll briefly discuss both below.

1.  First, the appraiser will need to analyze the purchase agreement for an appraisal done for the sale of a home.  In a refinance appraisal, there is no purchase agreement we have to analyze. In a purchase appraisal, the contract price may be a reliable indication of the value that the appraiser should take into consideration, and is why most of the time, the appraised value is at – or right around – the purchase price.  However, in a refinance appraisal, the appraiser has no additional indicators of value because the bank doesn’t tell the appraiser what the home needs to appraise for (thankfully!).  In both situations, the appraiser still must maintain their objectivity and neutrality, regardless if there is a ‘number to hit’ or not.
2. The only other thing worth mentioning here is that when you purchase a home and have an appraisal done, you (as the purchaser) are typically not present for the appraisal.  Usually, if the home is occupied, it’s just the seller present; and if the home is vacant, typically no one comes to meet the appraiser. Although we have known a buyer to show up for an appraisal (and there’s nothing wrong with that), most of the time, we just see the seller – if anyone at all.  Conversely, during a refinance appraisal, you are the owner of the home already, and you’re simply refinancing the mortgage on your home. So you’re going to be there (or have the option to be there) for the appraisal. This is especially helpful, as you can point out to the appraiser recent improvements, or maybe relevant sales in the neighborhood.
   

Those are the only minor differences.  The process – from what the appraiser does on-site, to how the appraiser develops his or her opinion of value – does not change.  The refinance appraisal is not less reliable (unless it’s a driveby – do we have an external link we can insert for a previous post?), and it isn’t ‘usually higher’ like the Realtor said in the Podcast I mentioned earlier.  Think about that for just a second. Why would a bank want to lend you money no matter what?  No matter what the appraisal comes back at?  No matter what the home is really worth?  I just don’t understand that line of thinking.   Even if the bank just wanted to loan you a ton of money, they have no control over the appraised value.  The appraiser is to remain objective and impartial, regardless of the type of appraisal. Just because it’s a refinance appraisal, doesn’t mean the appraiser is going to throw all of that out the window, and just appraise the home as high as possible so the bank can lend a bunch of money.

With the two exceptions of the existence of a purchase agreement, and also who attends the appraisal inspection, an appraisal is much the same regardless if it’s for a refinance or purchase transaction.  And through it all, the appraiser must remain independent, objective, and impartial, and must always do their best to develop a credible opinion of value.

Do you have other questions like this one?  We’d love to hear from you!

Helping homeowners navigate the appraisal process,

Ryan Bays, SRA, AI-RRS

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