Three approaches to value

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

Sales Comparison Approach: 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 sold for recently, with appropriate adjustments for time, site size, living area, amenities and so on.  It is these adjustments where the expertise of the professional appraiser becomes necessary -- computers can't tell you how much or little to adjust for a home's features, without knowing current market demand and the quality of the amenity, in that particular location.

Cost Approach:  Another approach is the cost approach.  How much would a property cost to replace, that is, rebuild, 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".  The cost approach is MOST reliable when a home is less than 5 years old.   The cost approach is also useful in determining the value of special use properties, special purpose properties or properties where subsequent structural improvements greatly impact value. 

Here's an interesting article (for appraisers!) on Why The Cost Approach Does NOT Equal Fee Simple Market Value!

Income Approach:  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, non owner-occupied houses, duplexes and the like.  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.  A "Gross Rent Multiplier" [GRM]  analysis is typically applied when valuing single-family rental properties.