A comparable sold for a cash-equivalent price of $640,000 and has annual EGI of $80,000. The subject property has annual EGI of $75,000. Market data indicate the subject would sell at the same price-to-income ratio, and no other adjustments are required. What value is indicated for the subject, to the nearest dollar?
Correct Answer
A) $600,000
640000÷80000×75000 = 600000. Common errors: inverting the income ratio (comparable income ÷ subject income) gives $682,667; using the comparable price without adjusting for the income difference gives $640,000; adding the income difference dollar-for-dollar to the comparable price gives $635,000.
Why This Is the Correct Answer
Option A is correct because the comparable ratio is $640,000 ÷ $80,000 = 8.0, and 8.0 × $75,000 subject EGI = $600,000. Because the subject earns less EGI than the comparable, its indicated value is proportionally lower.
Why the Other Options Are Wrong
Option B: $635,000
Option B, $635,000, comes from $640,000 + ($75,000 − $80,000), adding the income difference dollar-for-dollar to the price. The ratio must be applied: $640,000 ÷ $80,000 × $75,000 = $600,000.
Option C: $640,000
Option C, $640,000, uses the comparable price with no adjustment for the subject's lower EGI. The correct value is $640,000 ÷ $80,000 × $75,000 = $600,000.
Option D: $682,667
Option D, $682,667, comes from $640,000 × $80,000 ÷ $75,000, which inverts the income ratio. The correct calculation is $640,000 ÷ $80,000 × $75,000 = $600,000.
Divide the comp, multiply the subject
Comparable price ÷ comparable income gives the multiplier; multiplier × subject income gives value.
How to use: Use this two-step order for any comparable-based income multiplier problem.
Exam Tip
Check direction: if the subject's income is lower than the comparable's, the indicated value should be lower than the comparable price.
Common Mistakes to Avoid
- -Inverting the income ratio
- -Using the comparable price without adjusting for income
- -Adding the income difference directly to the price
Concept Deep Dive
Analysis
This question tests extracting a price-to-income ratio from a comparable and applying it to the subject. Divide the comparable's price by its EGI to get the ratio, then multiply by the subject's EGI. The ratio must be applied to the same level of income from which it was derived.
Background Knowledge
A price-to-income multiplier is extracted by dividing a comparable's cash-equivalent price by its income. It is then applied to the subject's income measured the same way. Value moves in proportion to income when the same multiplier applies.
Real-World Application
An appraiser finds a recent cash-equivalent sale of a similar fourplex. She derives its price-to-EGI ratio and applies it to the subject's EGI, measured on the same basis, as one indication in the income approach.
More Income Approach Questions
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Previous Question
Annual retail PGI is $180,000 and combined loss for that segment is 8%. Annual office PGI is $120,000 with combined loss of 12%. There is no other income. What is their combined annual EGI?
Next Question
An appraiser is analyzing the sale of a fourplex to develop a gross income multiplier. The nominal sale price was $1,000,000, and the seller paid $40,000 in loan points to an institutional lender as part of the buyer's financing. Potential gross income at the time of sale was $120,000. The subject fourplex has potential gross income of $110,000. What is the indicated value of the subject?