Approaches to Value
The Montana Supreme Court approved the use of the traditional appraisal methods or approaches for determining market value. The Department of Revenue uses the three approaches to value discussed below, utilizing a computer assisted mass appraisal system (CAMAS), for determining market values. The type of property and the amount and quality of information available determines the best approach to value the department uses. Not all approaches are relevant nor are they necessarily pertinent in every valuation, although the department reviews and considers each approach.
Sales comparison approach - This is the preferred approach for residential property. We also use it frequently in the appraisal of vacant land. It involves the compilation of sales and offerings of properties that are comparable to the property being appraised.Using this approach depends on there being a sufficient number of comparable sales.
We use mass appraisal techniques employing models developed in conjunction with a comparable sales analysis to provide an estimate of the market value of each property. In the analysis, we valuate individual properties using three to five comparable sales. We adjust the comparable sales for any dissimilarity that may affect value such as square foot of living area, location, year built, date of sale, quality grade, etc. The result is an estimate of market value for the subject property. What makes this approach significant is that it produces estimates of value that directly reflect market conditions.
Cost approach - The cost approach involves determining the replacement or reproduction cost new for each structure and the deduction of any loss in value due to depreciation. We add the depreciated cost to the estimated value of the land. The significance of the cost approach lies in the extent of its application. It is the one approach that can be used on all types of construction on each type of property. This approach is the strongest approach in the appraisal of property when lack of adequate market and income data prohibits us from using other approaches to value.
Income approach - The income approach defines value as the present worth of future benefits of the property by the capitalization of the net income stream over the remaining economic life of the property. This approach involves making an estimate of the "effective gross income" of a property. We derive this estimate by deducting the appropriate vacancy and collection losses from its estimated economic rent, as shown by the yield of comparable properties. From this figure, we deduct applicable operating expenses, resulting in an estimate of net income which may then be capitalized into an indication of value. The basic formula is: value equals income divided by rate.
The income approach is the department’s preferred appraisal approach for valuing commercial property. But the approach is limited by the amount of relevant data and income information available. If the department uses the income approach as one approximation of market value and sufficient, relevant information on comparable sales and construction cost exists, the department reconciles and considers the other information as well.