A comparable apartment has an elevator and the subject does not. Market rents show a $6,000 annual rent difference, and the market capitalization rate is 7.5%. Using capitalization of the rent difference, what adjustment applies to the comparable?
Correct Answer
A) −$80,000
The rent difference is capitalized: $6,000 ÷ 0.075 = $80,000. The comparable is superior, so the adjustment is negative. Multiplying by the rate, misplacing the rate’s decimal or using one year’s rent are errors.
Why This Is the Correct Answer
Option A is correct because the $6,000 annual rent difference is capitalized by dividing by the 7.5% rate: $6,000 ÷ 0.075 = $80,000. The comparable is superior because it has the elevator, so its price is adjusted down by $80,000.
Why the Other Options Are Wrong
Option B: −$45,000
Option B is wrong because −$45,000 comes from multiplying the rent difference by the rate written as a whole number: $6,000 × 7.5 = $45,000. Capitalization divides income by the rate, $6,000 ÷ 0.075 = $80,000, so the adjustment is −$80,000.
Option C: −$8,000
Option C is wrong because −$8,000 divides by 0.75 instead of 0.075: $6,000 ÷ 0.75 = $8,000. A 7.5% rate is 0.075, so $6,000 ÷ 0.075 = $80,000, giving −$80,000.
Option D: −$6,000
Option D is wrong because −$6,000 uses only one year's rent difference rather than capitalizing it. The rent difference must be converted to value, $6,000 ÷ 0.075 = $80,000, giving −$80,000.
IRV: Value Equals Income Over Rate
In IRV, Income ÷ Rate = Value, so divide the rent difference by the cap rate to get the value difference.
How to use: Use IRV whenever a question converts an income or rent difference into a dollar adjustment.
Exam Tip
Convert the percentage rate to a decimal before dividing, and then set the sign by asking whether the comparable is superior or inferior.
Common Mistakes to Avoid
- -Multiplying the rent difference by the cap rate instead of dividing
- -Using one year's rent difference as the adjustment
- -Converting 7.5% to 0.75 instead of 0.075
Concept Deep Dive
Analysis
This question tests capitalizing a rent difference into a value adjustment. An annual rent difference caused by a feature is divided by a market capitalization rate to estimate its value effect. The comparable has the elevator and the subject does not, so the adjustment to the comparable is negative.
Background Knowledge
Capitalization of a rent difference converts a permanent difference in income into a value difference using direct capitalization, value equals income divided by rate. It is often used for physical differences such as an elevator. Both the rent difference and the capitalization rate should be market supported.
Real-World Application
An appraiser values a walk-up apartment building, and one comparable has an elevator. Market rents show elevator buildings earn about $6,000 more per year, and the market cap rate is 7.5%. She capitalizes the difference to $80,000 and subtracts it from the comparable.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
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The appraiser’s adjustments are so large that the subject may not conform to its neighborhood. Under Fannie Mae guidance, what follows?
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A comparable single-family home was listed at $339,000 and sold for $332,000 with seller financing at a rate well below the market rate. Paired sales of similar homes bought with conventional loans show the seller financing raised the price by $14,000. The sale went under contract eight months and closed six months before the effective date. Market data show a 4% increase in prices since the contract date and 3% since the closing date. Under Fannie Mae's Selling Guide, what is the comparable's price after the financing and market conditions adjustments?