A home purchase, for most people is the single largest investment they will ever make.  Purchasing a home is a complex process with many financial parties involved.  The Realtor is probably the most common face of this process and is instrumental in assisting buyers in located a property to purchase .  The mortgage lender provides the financing in order to purchase the property.  The title company ensures that every aspect of the purchase is completed and that a clear title passes from the seller to the buyer.  As we can see there are a lot of interested parties who want to know exactly what a particular property might be worth.  So what is an Appraisal?  In short, an appraisal is the act or process of developing an opinion of value.  The appraisers role in this transaction is to provide an unbiased estimate of true and full value based on what a typical buyer might expect to pay or a seller may expect to receive for a piece of real estate, assuming that both buyer and seller are informed parties.   

 What exactly goes into a real estate appraisal?  The Appraisal process consists of three primary parts.  The first is the Inspection, the second is the approaches to value, and the third is the the reconciliation.

 The process always begins with the inspection of the property.  The appraiser must physically inspect the property to in order to determine the characteristics unique to the property and to determine which of these unique characteristics have an effect on the true and full value of the parcel.  Common characteristics collected for a property include, but are not limited to, square footage, number of bedrooms and bathrooms, amount of basement finish, layout of the structure, and age of the property.  Two major pieces of information collected by the appraiser that have a major influence on the true and full value are the quality of construction and the condition of the property.  

The three approaches to value are the cost approach, the sales comparison approach, and the income approach.  Typically, when an appraisal is performed on a single-family home the sales comparison approach is the primary approach used to determine the true and full value of the property.  The cost approach is also useful, but it is more useful when used to appraise newer homes and loses its usefulness as the home ages.  Seldom is the income approach used to value a single-family residential home and is the approach used to determine the value of income producing properties (such as a rental house or multi-family property like a 4-plex).

The cost approach uses information on local building and labor costs as well as additional factors to determine what it would cost to construct a property similar to the parcel being appraised.  This generally represents the high end of the range.  Most buyers would not pay more for an existing property than what they could pay to have a new one built.  In order to arrive at a true and full value by using the cost approach, the appraisal determines the cost to build a similar property and then applies depreciation which is determined by analyzing the housing market of similar type properties.

The Sales comparison Approach is determined by comparing the property being appraised against properties with similar characteristics or features that have recently sold.  The appraiser identifies appropriate amenities or features and makes adjustments to the comparable properties based on market determined elements of comparison.  Some of these elements of comparison may include:  Location, neighborhood amenities & traffic patterns, size of structure, number of bedrooms, number of bathrooms, types of flooring, & fireplaces to name a few.  

When using the income approach to arrive at the true and full value of a property the appraiser determines the amount of income the property is expected to produce over the foreseeable future.  Investors generally place more importance with the amount of income they can expect to earn from a property rather than the characteristics and amenities the property has which is primarily what single-family home buyers are concerned with.

Reconciliation is the last phase of the valuation process in which all of the data collected during the inspection process and the value approaches derived from that data collected are resolved into a final opinion of true and full value for the property being appraised.  This value opinion can expressed as either  a single point  estimate or a within a range of value.  While this value is probably a good indication of the worth of the property, it does not necessarily mean this will be the final sales price of the property.  There are many factors involved in the final sale price of a property, such as motivation on the part of the buyer or seller or bidding wars due to high demand of a specific type of property.