Okay, let’s address the obvious first. The biggest house has more square footage than the smaller one. Duh. But that’s not what we’re going to talk about today. As it relates to appraised value is the message here.
When lenders assign value during a purchase transaction, they start with the sales contract. The sales contract should reflect the lowest the seller was to accept compared to the highest price the buyer will pay, all other things being considered. This conjunction works in a non-distressed transaction. A non-distressed transaction is one where the sellers aren’t motivated by the threat of a foreclosure or sudden family issues that might force a quick disposal of the property. What we’re talking about is a fair, open market where homes are sold within a reasonable time with respect to ‘days on market’ or DOM.
Most often the lender assigns a completely or closely to the agreed upon sales price.
Valuation can be assigned based upon recent sales of similar properties in the neighborhood. The lender takes a look at the subject property and the appraiser will provide information regarding recent sales that support the sales price of the new transaction. With a full appraisal, the appraiser attempts to find at least three recent sales that would support the value along with a current listing. So what does this have to do with the biggest house v the smallest one?
The biggest house will be compared to the other houses in the area which are all smaller. There’s not much that recent similar sales can do to boost the value of the home. In fact, it wouldn’t be surprising for an appraiser to have difficulty supporting the sales price of the bigger home because, strictly speaking, there are none.
On the flip side is the smallest house. Here, the recent comparable sales are all bigger. This can ultimately mean the appraised value of the smaller property could be inflated because recent similar sales would, typically, have a higher sales price. In this example, value adjustments could be made that increase the appraised value. Note, with a purchase contract, it’s likely the appraised value will come in at or slightly above the sales price. But no, buyers aren’t able to use that increased valuation as part of their down payment.
With a refinance, the process is essentially the same but without the benefit of a contract. Here, recent sales will carry more weight where the smaller houses would reap some degree of valuation benefit while the bigger one might actually experience some bumps in the road to meet the owner’s desired value.