A cash-equivalent comparable price is $720,000 and annual EGI is $90,000 on the specified comparable basis. What is price ÷ EGI?
Correct Answer
B) 8.0
720000÷90000 = 8. Common errors: misplacing the decimal (dividing by 900,000) gives 0.8; misplacing the decimal (dividing by 9,000) gives 80.0; expressing EGI ÷ price as a percentage instead of price ÷ EGI gives 12.5.
Why This Is the Correct Answer
Option B is correct because the effective gross income multiplier is price divided by EGI: $720,000 ÷ $90,000 = 8.0. It is applied later to the subject's EGI measured on the same basis.
Why the Other Options Are Wrong
Option A: 0.8
Option A, 0.8, misplaces the decimal by dividing by $900,000 instead of $90,000: $720,000 ÷ $900,000 = 0.8. The correct division is $720,000 ÷ $90,000 = 8.0.
Option C: 12.5
Option C, 12.5, expresses EGI ÷ price as a percentage: $90,000 ÷ $720,000 × 100 = 12.5. The question asks for price ÷ EGI, which is $720,000 ÷ $90,000 = 8.0.
Option D: 80.0
Option D, 80.0, misplaces the decimal by dividing by $9,000 instead of $90,000: $720,000 ÷ $9,000 = 80.0. The correct result is $720,000 ÷ $90,000 = 8.0.
Multiplier is price on top
A multiplier answers how many times income the buyer paid, so price goes on top and income on the bottom.
How to use: Use this to set up any GRM, GIM or EGIM extraction.
Exam Tip
Estimate the size first: a price several times income should give a multiplier in the single or low double digits, which helps spot decimal errors.
Common Mistakes to Avoid
- -Inverting the ratio and reporting income over price
- -Misplacing the decimal in the income figure
- -Mixing potential gross and effective gross income bases
Concept Deep Dive
Analysis
This question tests extracting an effective gross income multiplier from a comparable sale. The multiplier is price divided by EGI, a plain number rather than a percentage. $720,000 ÷ $90,000 = 8.0.
Background Knowledge
An effective gross income multiplier (EGIM) relates sale price to effective gross income. Like other gross multipliers, it must be applied to the same level of income from which it was derived. It is a ratio, not a rate, and is the reciprocal of the EGI-to-price relationship.
Real-World Application
An appraiser verifies a cash-equivalent sale of a fourplex at $720,000 with $90,000 of effective gross income. The resulting 8.0 EGIM is added to a set of comparables used to value the subject.
More Income Approach Questions
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