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

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

So who ensures the value of the property is in line with the amount being paid for it? There are too many people exposed in the real estate process to let transactions proceed without ensuring that the value of the property is in line with the amount being paid for it.

This is why you need an appraisal.  The appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receive - 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 appraiser to provide them with the most accurate estimate of the market value of their property.

The Inspection
What goes into a real estate appraisal? It generally begins on the appraiser's end with legal research about the property and some questions about it, like a descrption of the property, an inventory of its main features, its transfer history, etc.  Then the appraiser will make an appointment to inspect the property to be completely familiarized with it.  The appraiser inventories features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and to identify what their condition is. The inspection frequently includes a sketch of the property, ensuring the proper square footage is counted, and conveying the layout of the property. Most important, the appraiser looks for any obvious features, or defects, that would affect the value of the house.

Once the site has been inspected, the appraiser uses two or three "approaches" to determine the value of the property: sales comparison and cost approach are the most usual, and, in the case of an investment property, an income approach might be needed.

Sales Comparison
Appraisers rely on the sales comparison approach to value typcally as the main method to determine value where recent sales of the most similar properties to the subject property are compared and differences assessed. Appraisers get to know the neighborhoods in which they work and understand the value of certain features to the 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.

Using knowledge of the value of certain items such as square footage, extra bathrooms, amenities such as hardwood floors, fireplaces or view lots (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.

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.

Cost Approach
In the cost approach the appraiser uses information on local construction costs, labor rates and other factors to determine how much it would cost to construct the property 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? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.

Reconciliation
Integrating information from all of the approaches used to analyze the value, the appraiser then uses his professional judgment to estimate the market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There may be mitigating factors such as seller motivation, urgency or competition for a property from other buyers that might increase or decrease the final sales amount. But the appraised value is often used as a guideline for lenders who do not want to loan a buyer more money than a property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make an informed real estate decision.