Not all the posts here are going to be about basics. But there are a lot of misconceptions about real estate appraisals, primarily because it is not really an exact science. I get asked questions about it daily and I'm happy to try to clear up some of the most common fallacies:

Misconception: Appraisers calculate the value of a property based on a certain formula like a specific price per square foot. 

Truth: There’s really no definitive measurement that appraisers use to evaluate property value. There are a number of factors such as location and how close it is to other facilities, condition, size, and the price of similar properties being sold in the market that factor significantly into the appraisal and are not part of any standardized formula. 

Misconception: The market value of a property is automatically its appraisal value. 

Truth: Although ideally, assessed value is the estimated market value of the property, the appraiser must also consider other factors, some of which were mentioned above. In other words, Zillow can't really tell you what a home is worth - except in a dream world where most homes are sold on E-bay.

Misconception: Market value should equate to replacement cost. 

Truth: Market value is the amount agreed upon by both the seller and buyer of the property. A replacement cost, on the other hand, is the estimated price of reconstructing the property and, frankly, these can be quite different. Think about it - when you buy a house, do you decide what it's worth by pricing the materials and labor today? That can be a factor in some kinds of valuations, but for most single-family dwellings, market trends are far more important. If the current housing market underscores anything, it's that.

Misconception: You generally can tell what a property is worth simply by looking at the outside. Mostly, it's curb appeal.

Truth: You might get that idea from some of the articles on staging. Staging can help sell a home faster, but $5000 in staging might not account for $500 in actual value. How a property looks on the outside is simply one of the many factors that come into play when estimating its value. Other things that affect appraisal are location, form and state of the property, improvements made on the property, proximity to amenities and market trends. 

Misconception: Home inspection and home appraisal are the same thing.

Truth: No, but both involve an inspection of the property. One is determing the value of the property, and the other is determining the type and cost of needed repairs. Put another way, a home inspection is the process of assessing the condition and state of a property. Home appraisal, on the other hand, is the evaluation of the property’s sale value. The result of home inspection can affect the appraisal of a home, because the condition of the property is one of the factors considered in determining its worth. Rule of thumb - even if you sell your own home - perhaps especially then - you want both.

I'm surprised how often I'm asked what actually goes into a property appraisal. Of course it depends on the type of property and purpose of the appraisal. Property valuation strategies may be different, but the overall process is the same: 

1. Appraiser's Property Inspection: The first and most essential step in appraisal is the home or property inspection. This should take 15 minutes to 1 hour depending on the type of the house, floor plan, size, features and conditions. Do not rely on supposedly “appraisal experts” that give appraisals without seeing and inspecting the property first. Proper appraisal is impossible without actual property examination.  
 
2. Research: There are two approaches in examining the value of a home or property: 

• The Cost Approach calculates how much it will cost if the house will be constructed now, noting labor cost and the price of the same materials, then add the projected price of the vacant lot today, and deduct all depreciation factors.
  
• The Sales Comparison Approach assesses the value of a home or property based on the market trends. With consideration for factors such as location, amenities, conditions, renovations, the appraisal will be based on the prices of similar properties being sold in the market recently.

 3. Final Estimate: Based on the two research methods, the final estimate is based on the approach that is backed up by significant market data and statistics and the one that suits the property best. By and away, this is the sales comparison approach for most single family dwellings.

4. Your Report: An appraiser produces the report that details the results and contains the following:

• Assessed value
• Effective date of the appraisal
• Certification and signature
• Purpose of the appraisal
• Qualifying conditions
• State of the neighborhood
• Identification of the property and its ownership
• Data interpretation including assumptions made
• Other supporting materials such as maps, plans, charts, photographs, etc.