Valuation, Market Analysis, and Pricing
The three approaches
Sales comparison: adjust the comparables for differences (location, size, condition, market timing) - adjust the comparable, never the subject. Cost approach: land value plus replacement cost new, minus depreciation (physical deterioration, functional obsolescence, external obsolescence); most reliable for new or special-purpose buildings. Income approach: value = net operating income ÷ cap rate; the gross rent multiplier is price ÷ gross rent.
Highest and best use - legally permissible, physically possible, financially feasible, maximally productive - frames every value opinion. Reconciliation weights approaches by relevance; it is not an average.
Alaska factors
Remote access, permafrost and foundation type, heating and utility costs, well and septic versus municipal service, flood and erosion exposure, and thin comparable pools in rural areas. In bush communities the cost approach and construction-cost data often carry more weight, and appraisers make large location and access adjustments. Keep assessed value (municipal tax roll) separate from market value.
Traps
- Adjusting the subject instead of the comparable.
- Applying a cap rate to gross income rather than NOI.
- Double-counting an adjustment (size and room count for the same difference).
- Treating assessed value as market value.
Worked example
A duplex has $84,000 gross income and $30,000 operating expenses, so NOI = $54,000. Comparables indicate a 9% cap rate. Value = $54,000 ÷ 0.09 = $600,000. At a $700,000 asking price the indicated cap rate would be 7.7% - a materially thinner return for the buyer.