The subject property has annual NOI of $96,000. A comparable with annual NOI of $100,000 sold for a cash-equivalent price of $1,250,000. Market data indicate the same price-to-income ratio applies to the subject, and no other adjustments are required. What value is indicated for the subject, to the nearest dollar?
Correct Answer
A) $1,200,000
1250000÷100000×96000 = 1200000. Common errors: inverting the income ratio (comparable income ÷ subject income) gives $1,302,083; using the comparable price without adjusting for the income difference gives $1,250,000; adding the income difference dollar-for-dollar to the comparable price gives $1,246,000.
Why This Is the Correct Answer
Option A is correct because $1,250,000 ÷ $100,000 = 12.5, and 12.5 × $96,000 = $1,200,000. Equivalently, the comparable implies an 8% overall rate, and $96,000 ÷ 0.08 = $1,200,000.
Why the Other Options Are Wrong
Option B: $1,246,000
Option B, $1,246,000, comes from $1,250,000 + ($96,000 − $100,000), adjusting the price dollar-for-dollar for the income difference. The ratio method gives $1,250,000 ÷ $100,000 × $96,000 = $1,200,000.
Option C: $1,250,000
Option C, $1,250,000, uses the comparable price without adjusting for the subject's lower NOI. The correct value is $1,250,000 ÷ $100,000 × $96,000 = $1,200,000.
Option D: $1,302,083
Option D, $1,302,083, comes from $1,250,000 × $100,000 ÷ $96,000, which inverts the income ratio. The correct calculation is $1,250,000 ÷ $100,000 × $96,000 = $1,200,000.
Divide the comp, multiply the subject
Comparable price ÷ comparable NOI gives the multiplier; multiplier × subject NOI gives value.
How to use: Use this sequence whenever a comparable's price and income are given for a subject value.
Exam Tip
Check that lower subject income produces a value below the comparable price; an answer above it signals an inverted ratio.
Common Mistakes to Avoid
- -Inverting the ratio of incomes
- -Adopting the comparable price unchanged
- -Adding the income difference directly to the price
Concept Deep Dive
Analysis
This question tests applying a comparable's price-to-NOI ratio to the subject's NOI. Divide the comparable price by its NOI, then multiply by the subject's NOI. This is equivalent to extracting an overall rate and capitalizing the subject's NOI.
Background Knowledge
Dividing a comparable's net income by its cash-equivalent price gives a market-derived overall rate. The reciprocal is a price-to-NOI multiplier. Applying either to the subject's NOI, measured the same way, gives a value indication.
Real-World Application
An appraiser valuing a rented fourplex finds a nearby cash-equivalent sale of a similar fourplex with verified NOI. She extracts the overall rate from that sale and applies it to the subject's NOI to develop her income approach.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
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