Valuation, Pricing, and Market Analysis
The three approaches
Sales comparison for most residential property, cost (replacement or reproduction cost minus depreciation, plus site value) for new or special-purpose property, and income (direct capitalization and gross rent multipliers) for investment property. Reconciliation weights the approaches by relevance, not by averaging.
Market value assumes a willing buyer and seller, both informed and unpressured, with reasonable exposure time. Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.
Where candidates lose points
- Adjustments go to the comparable, not the subject. If the comparable is superior, subtract; if inferior, add.
- A CMA is not an appraisal. Licensees prepare CMAs and price opinions; appraisers follow USPAP and Montana appraiser licensing rules.
- External obsolescence is generally incurable because it lies outside the property line.
- Contribution, regression, and progression explain why an over-improvement can add less than its cost, or why a modest home benefits from expensive neighbors.
Formulas to own
Cap rate equals net operating income divided by value; value equals NOI divided by cap rate; GRM equals price divided by gross monthly rent.
Worked example: a small retail building produces $48,000 NOI, and comparable sales indicate a 8% cap rate. Value = $48,000 / 0.08 = $600,000. If the rent roll rises but the cap rate holds, value rises proportionally; the cap rate itself is set by the market, not by the owner.
Rule of thumb: income approach uses NOI (before debt service and income taxes), never gross rent, and never the owner's mortgage payment.