Three approaches to value

There are three ways to determine the value of real property, and each plays a part in the appraisal process.

The most widely-used and accepted in residential practice is the sales comparison approach. This approach bases its opinion of value on what similar properties in the vicinity have recently sold for, with appropriate adjustments for time, acreage, living area, amenities, and so on.  It is these adjustments where the expertise of the professional appraiser becomes necessary -- no computer can tell you how much or how little to mark up for a fireplace without knowing the neighborhood or even talking to Realtors and recent buyers in the area about how important that amenity is in that particular location.

Another approach is the cost approach.  How much would a property cost to replace minus "accrued depreciation", that is, depreciation that has occurred since the property actually was built?  The cost approach includes concepts like "economic life" and "effective age" that are used in determining depreciation.  The cost approach to value is particulary useful when valuing special use properties, new construction, or properties that are not frequently exchanged in the open market.

The third approach to value is called the income approach.  Some properties generate income for their owners -- the most obvious examples being rental properties such as apartment buildings and non owner-occupied houses and duplexes.  The rental income an owner might reasonably expect from a property is part of its value.  For a purely owner-occupied residential property this may not be applicable, but it can be important if the property is to be rented or used otherwise to generate income.