The Realtor’s Guide to Appraisals Part 4: The Difference Between a Purchase & Refinance Appraisal

Have you ever listed a home and during your listing appointment, the homeowner mentioned a previous appraisal?  Maybe they kept impeccable records and had the appraisal from when they bought the home, as well as a refinance appraisal from two years ago.  Which one should you use?  What’s the difference between the two? 

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Read on to find out!

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.  There’s a lot of confusion around this topic, and I’ve even heard it said that a refinance appraisal is usually higher because it’s in the bank’s best interest to loan you money and make sure that the property appraises at a high price!  That’s simply not true, so let’s answer this question once and for all.

Again, the question is, “Is there a difference between an appraisal completed for a refinance vs purchase?”  And, 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 value that the appraiser should take into consideration, and is why most of the time, the appraised value is at – or right around – 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 someone purchases a home and has an appraisal done, the purchaser is 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 – and sometimes the Realtor.  Conversely, during a refinance appraisal, the borrower owns the home already, and they’re simply refinancing the mortgage on their home.  So the homeowner will be there (or have the option to be there) for the appraisal.  This is especially helpful, as the homeowner 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, and it isn’t ‘usually higher’ like some think.  Regardless of the type of appraisal or financing, the appraiser is to remain objective and impartial.  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.

So the next time you go to list a property, you might want to ask the homeowner if they’ve had their home appraised recently.  If they have, it will most likely have been for a refinance.  If the appraisal was a full appraisal with an interior inspection completed by the appraiser, then it can be a document worth looking into.  Treat it like a starting point.  You’ll still want to do your own analyses and homework, but that previous appraisal can definitely give you a head start. Just keep in mind that appraisals do have a shelf-life, so the further you are from the date of appraisal, the less applicable it will be for your listing – especially in increasing or decreasing markets.

Committed to helping you understand your home’s market value,

Ryan Bays, SRA, AI-RRS