Is it possible for rehab loans to be more benefit to seller???

[Nnaemeka Anyadike]

I am in the process of trying to purchase a home and have a quick question. If you were to placed an offer on a home that needs a work after a bit of a bidding war. 

I still have yet to finalize the official offer and end attorney review. 

If I do a rehab loan (FHA or Homestyle) will the loan approval be based on the appraised value after doing the rehab work? Does this process take into account the value of the home before renovations or is it based on the offered amount from the buyer?

i.e. 

situation #1: approval of loan if appraised value after reno is >/=  the actual value of home + rehab costs 

situation #2: approval of loan if appraised value after reno is >/= the offered amount + rehab costs

If situation 2 is correct wouldn't this be advantageous for the seller?