The subject property is a fourplex with annual gross income of $60,000. Its tenants pay their own utilities, and its operating expense ratio is 40%. An appraiser has researched three fourplex sales nearby. Sale 1 sold for $496,000, with gross income of $62,000 and a 41% expense ratio. Sale 2 sold for $524,800, with gross income of $64,000 and a 39% expense ratio. Sale 3 sold for $313,600, with gross income of $56,000 and a 62% expense ratio; its owner pays all utilities. The appraiser gives equal weight to the sales that are similar to the subject in expense structure. What value is indicated by the gross income multiplier?
Correct Answer
C) $486,000
Sale 3's 62% expense ratio differs materially from the subject's 40%, so its 5.6 multiplier does not fit this subject. Sales 1 and 2 give 8.0 and 8.2, a mean of 8.1, and 8.1 × $60,000 = $486,000. Averaging all three sales pulls the result down to $436,000. Using Sale 1 alone gives $480,000, but both comparable sales carry equal weight. Averaging the two sale prices instead of applying a multiplier gives $510,400, which ignores the subject's own income.
Why This Is the Correct Answer
Option C is correct because Sales 1 and 2 have expense ratios close to the subject's 40% and multipliers of 8.0 and 8.2, a mean of 8.1. Applying that mean gives 8.1 × $60,000 = $486,000. Sale 3's 62% expense ratio leaves far less net income per dollar of gross income, which is why its 5.6 multiplier is much lower and does not fit this subject.
Why the Other Options Are Wrong
Option A: $436,000
Option A, $436,000, averages all three multipliers: (8.0 + 8.2 + 5.6) ÷ 3 = 7.2667, and 7.2667 × $60,000 = $436,000. Sale 3's 5.6 reflects an expense burden the subject does not have, so including it understates value compared with 8.1 × $60,000 = $486,000.
Option B: $480,000
Option B, $480,000, uses Sale 1's multiplier alone: 8.0 × $60,000 = $480,000. Sale 2 is equally comparable and carries equal weight, so the multiplier is the 8.1 mean, and 8.1 × $60,000 = $486,000.
Option D: $510,400
Option D, $510,400, averages the sale prices of Sales 1 and 2: ($496,000 + $524,800) ÷ 2 = $510,400. That skips the multiplier and ignores the subject's $60,000 income; the mean multiplier of 8.1 gives 8.1 × $60,000 = $486,000.
Screen expenses, then average multipliers
A multiplier cannot see expenses, so the appraiser has to look for it. Check each sale's expense ratio before the sale's multiplier goes into the average.
How to use: Use this when a GIM question lists several sales with expense or lease details beside the prices.
Exam Tip
When one sale's multiplier sits well apart from the others, look for the reason, such as a different expense burden. Details listed beside a sale often decide whether it belongs in the analysis.
Common Mistakes to Avoid
- -Averaging all available multipliers without checking expense ratios
- -Assuming a multiplier adjusts for differences in operating expenses
- -Relying on one comparable sale when two deserve equal weight
Concept Deep Dive
Analysis
The multiplication is the easy part; the judgment is which sales may supply the multiplier. A gross income multiplier capitalizes income before expenses, so it does not adjust for a sale whose expenses take a very different share of income. Compute each multiplier, compare expense ratios with the subject's, and drop the sale that does not match before averaging.
Background Knowledge
A gross income multiplier is the cash-equivalent sale price divided by gross income, and it is applied to the subject's income on the same basis. Because it is applied before expenses, a difference in the relationship of net income to gross income between a sale and the subject is not reflected in the result and may distort it. Comparability on expense ratios is therefore part of selecting the multiplier.
Real-World Application
An appraiser finds three fourplex sales for a gross income multiplier, but one building is master-metered with the owner paying utilities while the subject's tenants pay their own. That sale's low multiplier reflects its higher expenses, so the appraiser leaves it out of the multiplier conclusion and explains why in the report.
More Income Approach Questions
Which stated cause of supported value loss is external?
Improvement cost new is $450,000. Separately supported improvement depreciation deductions of $45,000, $25,000, $15,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $125,000, already reflecting any site losses. What total indicated value results?
Which two depreciation categories may each be classified as curable or incurable by comparing the cost to remedy a deficiency with the value gained?
Improvement cost new is $800,000. Separately supported improvement depreciation deductions of $120,000, $80,000, $40,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
The principle of anticipation in real estate valuation states that:
Which highest-and-best-use criterion addresses whether a proposed use is allowed by zoning and applicable legal restrictions?
Three comparables produce adjusted indications of $312,000, $309,000 and $315,000, requiring gross adjustments of 9%, 14% and 22% respectively. Verification also establishes that the first sale is the closest competitive substitute and its adjustments are better supported than the other two. Which indication deserves the most weight on those facts?
When reconciling value indications from the three approaches to value, an appraiser should:
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?
In reconciliation, an appraiser should:
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