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A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.

Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.

So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the actual value of the property is commensurate with the amount being paid.

This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receives - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed or certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.

The Inspection:

So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status and overall condition of that property. The appraiser must actually see the features, such as the number of bedrooms, number of bathrooms, the location, and so on, to ensure that they actually exist and are in the condition a reasonable buyer would expect them to be.  The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout or floor plan of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the house.

Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach if applicable, the sales comparison or market approach and, in the case of a rental property, an income approach to value.

Cost Approach:

The cost approach is the easiest to understand. The appraiser utilizes information on local building costs, labor rates and other factors, to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? This approach is usually applied for newer construction.

Sales Comparison:

Usually, the sales comparison approach (or Market Approach) best reflects the actions and reactions of typical buyers and sellers in the marketplace.  Appraisers are required to know the neighborhoods in which they work. They understand the value of certain features to typical residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach. The appraiser may also considerd current comparable listings and pending sales to determine current neighborhood market conditions.

Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

Income Approach:

In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Reconciliation To Value: