Here is a scan of the original sketch out of my sketchbook. I scan images between 200 and 300 dpi. I take the image into Painter and "equalize" to get rid of the grays. At this point, I cut and paste the entire image back into the canvas using shift+ctrl+v. This pastes the image back into the exact same spot. I change the composite method for the image to either gel or multiply. This causes all of the white areas to become transparent and I can paint on the base canvas without effecting my beginning image.
I paint in the background using a variety of watercolor brushes. I am using paper textures with lots of character so that I get exciting colors. I try at this point to set the color mood for the image. In this piece I decided that it would add a little mystery to the image if it was backlit by the moon. Everything is kept very fluid at this point. I try not to get into the coloring book mode of trying to "stay in the lines".
Look closely and you can see that I am beginning to add some texture to the cliff areas. This texture is made using a custom paper texture along with a custom variant of the square pastel brush. I set the grain slider to a very low value to make sure that I just pick out the texture of the paper. The grain slider is around 15 if I remember right. Sometimes at this point I will go ahead and drop the image and paint on only one layer.
The layers are merged and I begin to add color to the buildings and cliff areas. As in my traditional art, I paint from the dark to the light. In traditional painting (except watercolor) there is very parctical reason for working from dark up. In digital media I do the same out of habit.
I continue to paint adding more color.
- I paint the rim lit areas on the edge of the buildings and the orange in the windows. 
- I decide to add a little green grass at the bottom of the buildings. 
- I invert the paper texture to fill in the light areas on the cliffs. 
The next few mages are simply additional steps in the painting process. I am using the square chalk variant for the majority of the work. I am constantly changing the paper texture as I work.
This image shows how I am using the same paper textures but varying the scale to get different surfaces in different areas.
I'm also working more on the second set of buildings.
I tend to build the color up rather slowly to make sure that I get just the look that I'm after. Of course, the minute I say this, I'll do something completely different.
I have also removed the sign at the beginning of the path.
In this stage I have added a very subtle lighting effect to darken the overall image and give it more mystery.