The subject property has annual EGI of $92,000. A comparable with annual EGI of $100,000 sold for a cash-equivalent price of $850,000. Sales in the market area indicate the subject would sell at the same price-to-income ratio, with no other adjustments. What is the subject's indicated value, to the nearest dollar?
Correct Answer
A) $782,000
850000÷100000×92000 = 782000. Common errors: inverting the income ratio (comparable income ÷ subject income) gives $923,913; using the comparable price without adjusting for the income difference gives $850,000; adding the income difference dollar-for-dollar to the comparable price gives $842,000.
Why This Is the Correct Answer
Option A is correct because the comparable's ratio is $850,000 ÷ $100,000 = 8.5, and $92,000 × 8.5 = $782,000. The multiplier is applied to the same level of income from which it was derived, here annual EGI. No other adjustments are needed.
Why the Other Options Are Wrong
Option B: $842,000
Option B, $842,000, adds the income difference dollar-for-dollar to the comparable price: $850,000 + ($92,000 − $100,000) = $842,000. The $8,000 income shortfall translates into value through the 8.5 ratio, giving $782,000.
Option C: $850,000
Option C, $850,000, uses the comparable's price without adjusting for the subject's lower EGI. Applying the ratio to $92,000 gives $92,000 × 8.5 = $782,000.
Option D: $923,913
Option D, $923,913, inverts the income ratio: $850,000 × $100,000 ÷ $92,000 = $923,913. Since the subject earns less, its value should be lower; the correct result is $850,000 ÷ $100,000 × $92,000 = $782,000.
Extract the ratio, then apply
Divide the comparable's price by its income to get the ratio, then multiply the subject's income by that ratio.
How to use: Use this two-step method whenever a comparable's price and income are given.
Exam Tip
Check direction: lower subject income should produce a value below the comparable's price.
Common Mistakes to Avoid
- -Inverting the income ratio
- -Adjusting price dollar-for-dollar for the income difference
- -Using the comparable price unchanged
Concept Deep Dive
Analysis
This question tests extracting a price-to-EGI ratio from a comparable and applying it to the subject. The comparable's ratio is $850,000 ÷ $100,000 = 8.5, and applying it to the subject's $92,000 gives $782,000. Because the subject earns less, its indicated value is lower than the comparable's price.
Background Knowledge
An effective gross income multiplier relates sale price to EGI and is extracted from comparable sales. It is applied to the subject's EGI measured the same way. A change in income produces a value change scaled by the multiplier, not an equal dollar change.
Real-World Application
An appraiser has a sale of a similar fourplex with verified EGI. She extracts the EGI multiplier and applies it to the subject's lower EGI. She then considers whether expense differences call for further analysis before relying on the result.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
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Previous Question
The subject property is a triplex whose tenants pay all utilities. All recent sales of similar triplexes have owner-paid utilities, so those buildings collect higher rents and carry higher operating expenses. The gross rent multiplier from those sales indicates $365,000 for the subject, and the overall rate from the same sales, applied to the subject's NOI, indicates $405,000. No other adjustments are needed. Which reconciliation of the income approach is best?
Next Question
Sales of similar small apartment buildings indicate an overall rate of 6.7%. Lenders are quoting a 5.5% annual mortgage constant, and investors in these properties expect a 9.5% equity dividend rate. What loan-to-value ratio is consistent with these rates under the band of investment?