A commercial property has a gross income of $240,000 annually and sold for $2,000,000. Three years later, a similar property with gross income of $180,000 is being appraised. Using the gross income multiplier method, what is the indicated value?
Correct Answer
A) $1,500,000
GIM = $2,000,000 ÷ $240,000 = 8.33. Indicated value = $180,000 × 8.33 = $1,500,000.
Why This Is the Correct Answer
Option A is correct because it properly applies the two-step GIM calculation process. First, the GIM is calculated using the comparable sale: $2,000,000 ÷ $240,000 = 8.33. Then this multiplier is applied to the subject property's gross income: $180,000 × 8.33 = $1,500,000. This methodology assumes the market conditions and property characteristics remain sufficiently similar over the three-year period to make the comparison valid.
Why the Other Options Are Wrong
Option B: $1,350,000
$1,350,000 appears to result from calculation errors, possibly from incorrectly applying a different multiplier or making arithmetic mistakes in the division or multiplication steps.
Option C: $2,160,000
$2,160,000 suggests the candidate may have incorrectly multiplied the subject's income by 12 ($180,000 × 12 = $2,160,000), confusing monthly and annual income figures.
Option D: $1,800,000
$1,800,000 indicates the candidate likely used an incorrect GIM of 10.0, possibly from rounding $2,000,000 ÷ $200,000 or making other computational errors in establishing the multiplier.
GIM Two-Step Dance
Remember 'Divide then Multiply' - First DIVIDE the comparable's price by its income to get GIM, then MULTIPLY the subject's income by that GIM. Think 'D-M' like 'Dance Move' - you always do these two steps in order.
How to use: When you see a GIM problem, immediately write 'D-M' and set up: Step 1 (Divide): Sale Price ÷ Gross Income = GIM, Step 2 (Multiply): Subject Income × GIM = Value. This prevents mixing up the calculation order.
Exam Tip
Always double-check your GIM calculation by ensuring it's reasonable - most commercial property GIMs fall between 4-15, with 6-12 being most common. If your GIM is outside this range, recheck your math.
Common Mistakes to Avoid
- -Confusing the order of operations (multiplying first instead of dividing)
- -Using monthly income instead of annual income in calculations
- -Applying GIM from different property types or markets without proper adjustment
Concept Deep Dive
Analysis
The Gross Income Multiplier (GIM) method is a quick valuation technique used in commercial real estate appraisal that establishes a ratio between a property's sale price and its gross annual income. This method assumes that similar properties in the same market will have comparable income-to-value relationships. The GIM is calculated by dividing the known sale price by the gross annual income, then applying this multiplier to the subject property's income to estimate value. While simple and fast, this method requires truly comparable properties and stable market conditions to be reliable.
Background Knowledge
The Gross Income Multiplier method is one of three main approaches to real estate valuation, falling under the income approach category. It's particularly useful for quick valuations of income-producing properties when detailed financial information isn't available, but requires careful selection of truly comparable properties.
Real-World Application
Appraisers use GIM for quick feasibility studies, mortgage lending decisions, and preliminary valuations when full income statements aren't available. It's especially common for small commercial properties like retail strips, small office buildings, and apartment complexes where detailed operating expense data may be limited.
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