Which evidence most improves applicability of a gross-rent multiplier from sales?
Correct Answer
B) Similarity of subject and comparable income bases and operating characteristics.
Comparable income definitions, periods, vacancy and expense characteristics improve gross-multiplier applicability. A gross ratio does not explicitly deduct each cost, so unknown or atypical costs need investigation. No universal prohibition makes a multiplier unusable solely because the property is commercial or net leased.
Why This Is the Correct Answer
Option B is correct because a GRM implicitly assumes the subject and comparables have similar income definitions, vacancy and expense characteristics. When those match, the sale price-to-rent relationship from the sales is more applicable to the subject.
Why the Other Options Are Wrong
Option A: A residential property label, despite other differences.
Option A is wrong because a residential property label alone does not make sales comparable when other differences exist. Differences in income, expenses or physical traits can make the multiplier inapplicable.
Option C: A lack of expense information treated as proof of comparability.
Option C is wrong because a lack of expense information is not proof of comparability. Unknown expenses are a gap that calls for investigation, since a gross multiplier does not adjust for them.
Option D: An unusually low subject expense level that is ignored in the comparison with the sales.
Option D is wrong because ignoring an unusually low subject expense level weakens the comparison. Atypical expenses mean the subject may not share the comparables' operating characteristics.
Gross ratio needs similar operations
A gross multiplier hides expenses, so it works only when the properties operate alike.
How to use: Use this when judging whether a GRM from sales fits the subject.
Exam Tip
Choose the answer that confirms similarity in income and operating characteristics rather than a label or missing data.
Common Mistakes to Avoid
- -Relying on property type labels alone for comparability
- -Treating missing expense data as proof of similarity
- -Ignoring atypical subject expenses when applying a gross multiplier
Concept Deep Dive
Analysis
This question tests what makes a gross rent multiplier reliable. Because a GRM uses gross income and does not deduct each expense, comparables must share similar income bases and operating characteristics with the subject. Similarity is the evidence that supports applying the multiplier.
Background Knowledge
A gross rent multiplier is derived by dividing sale price by gross rent for comparable properties. Since expenses are not explicitly deducted, it works best when comparables share similar income potential, expense ratios, location and physical traits with the subject.
Real-World Application
An appraiser derives a GRM from duplex sales but notices one comparable has owner-paid utilities while the subject's tenants pay their own. The appraiser gives that comparable less weight because its expense structure differs.
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?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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