A client owns a fourplex with NOI of $36,000, and sales of similar fourplexes indicate an overall rate of 7.5%. The client is considering two plans. Plan A would raise NOI by $2,400 with no change in the overall rate. Plan B would leave NOI unchanged, but replacing the aging roof and building systems would lower buyers' perceived risk, and the appraiser concludes the overall rate would fall to 7%. Which plan adds more value, and by how much?
Correct Answer
D) Plan B, by $2,286
The starting value is $36,000 ÷ 0.075 = $480,000. Plan A gives $38,400 ÷ 0.075 = $512,000, a gain of $32,000. Plan B gives $36,000 ÷ 0.07 = $514,286, a gain of $34,286, so Plan B wins by $2,286. Treating the rate cut as proportional gives a false tie at $32,000, and multiplying value by the half-point gives a $2,400 gain and a false $29,600 lead for Plan A.
Why This Is the Correct Answer
The starting value is $36,000 ÷ 0.075 = $480,000. Plan A gives $38,400 ÷ 0.075 = $512,000, a gain of $32,000. Plan B gives $36,000 ÷ 0.07 = $514,286, a gain of $34,286, so Plan B wins by $2,286. Treating the rate cut as proportional gives a false tie at $32,000, and multiplying value by the half-point gives a $2,400 gain and a false $29,600 lead for Plan A.
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A property sold at a cash-equivalent price of $1,062,500. Its stabilized annual NOI is $85,000. What is the indicated overall rate?
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Two cash-equivalent sales are otherwise identical after controlling for rights, terms, date and relevant characteristics. The with-feature price is $400,000 and without-feature price $380,000. What positive contribution magnitude does this pair indicate for the feature? No direction toward a particular subject is requested.