An appraiser finds that similar properties sold at a price-to-income multiplier of 8.5, based on annual gross income. The subject's annual gross income is $180,000. What is the indicated value?
Correct Answer
C) $1,530,000
180000×8.5 = 1530000. Common errors: dividing by the multiplier instead of multiplying gives $21,176; dividing the result by 12 as if a monthly figure were needed gives $127,500; annualizing income that is already annual (×12) gives $18,360,000.
Why This Is the Correct Answer
Option C is correct because $180,000 × 8.5 = $1,530,000. The multiplier is applied to the same level of income from which it was derived, which here is annual gross income. No monthly or annual conversion is needed.
Why the Other Options Are Wrong
Option A: $21,176
Option A, $21,176, divides income by the multiplier: $180,000 ÷ 8.5. A multiplier is multiplied, giving $180,000 × 8.5 = $1,530,000.
Option B: $127,500
Option B, $127,500, divides the result by 12 as if a monthly figure were needed: $180,000 × 8.5 ÷ 12. The question asks for value, which is $1,530,000.
Option D: $18,360,000
Option D, $18,360,000, multiplies by 12 as though the income were monthly: $180,000 × 8.5 × 12. The income is already annual, so the value is $1,530,000.
Same income, same multiplier
Apply a multiplier only to the kind and period of income it was built from: annual gross with an annual gross multiplier.
How to use: Use this to check for a mismatch between monthly and annual figures in multiplier problems.
Exam Tip
Check the period on both the income and the multiplier; convert only when they differ.
Common Mistakes to Avoid
- -Dividing income by the multiplier
- -Converting annual income to monthly when the multiplier is annual
- -Applying a multiplier derived from a different income measure
Concept Deep Dive
Analysis
This question tests applying a gross income multiplier to income on the same basis from which the multiplier was derived. Both are annual gross figures, so value is income times the multiplier with no conversion. The distractors divide or introduce an unnecessary monthly conversion.
Background Knowledge
A gross income multiplier is the ratio of sale price to gross income for comparable properties. It must be applied to the subject's income measured on the same basis, such as annual potential or effective gross income.
Real-World Application
An appraiser derives an annual gross income multiplier from sales of similar small commercial buildings. The subject's annual gross income is multiplied by that factor as a supporting indication of value.
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