An appraisal is typically required when applying for a mortgage. If you are purchasing a home, the lender will base the loan amount off of the lesser of the sales price or the appraised value.
Many people will look to the price per square foot when valuing a home, however, this valuation could be misleading.
Appraisers look to comparable sales in the neighborhood when valuing a property; they do not focus on the price per square foot alone.
If you are purchasing a 2-car garage 2,000 square foot home for $400,000, appraisers will look for other sales of 2-car garage 2,000 square foot homes to compare. They will not necessarily look at the 3,000 square foot home down the street that recently sold for $850,000 and had a 4-car garage.
Using a price per square foot analysis, the $400,000 home is $200 per square foot while the $850,000 is $283 per square foot, this does not mean your home will appraise for $566,667 (2,000 square feet x $283 per square foot), in fact, if comparable sales of 2,000 square foot homes with 2 car garages were less than $400,000, then there is a chance your home could appraise for less than $400,000; the price per square foot analysis would not apply.
Be careful of pricing a home based on price per square foot.
Appraisers and lenders do not rely on this data alone and neither should you. Instead, look at all of the features of similarly priced homes in the area, the appraisal will likely be based on this criteria, and so will the loan.
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