The subject property produces annual gross income of $96,000. A price-to-income multiplier of 8.5 from comparable sales is also based on annual gross income. What value does it indicate?
Correct Answer
D) $816,000
96000×8.5 = 816000. Common errors: treating the annual income as monthly gives $68,000; dividing by the multiplier instead of multiplying gives $11,294; misplacing the decimal in the multiplier gives $81,600.
Why This Is the Correct Answer
Option D is correct because a multiplier is applied to the same level of income from which it was derived, and here both are annual gross income. $96,000 × 8.5 = $816,000. No period conversion is needed.
Why the Other Options Are Wrong
Option A: $11,294
Option A, $11,294, divides income by the multiplier instead of multiplying: $96,000 ÷ 8.5 = $11,294. The correct value is $96,000 × 8.5 = $816,000.
Option B: $68,000
Option B, $68,000, treats the annual income as if it needed monthly conversion: $96,000 × 8.5 ÷ 12 = $68,000. Both income and multiplier are annual, so value is $96,000 × 8.5 = $816,000.
Option C: $81,600
Option C, $81,600, misplaces the decimal in the multiplier, in effect using 0.85: $96,000 × 8.5 ÷ 10 = $81,600. The correct product is $96,000 × 8.5 = $816,000.
Match the multiplier's income
A multiplier only works on the same kind of income it came from: annual with annual, monthly with monthly. Price divided by income built it, so income times multiplier reverses it.
How to use: Use this to confirm the period and income definition before multiplying.
Exam Tip
A value from an annual multiplier should be several times the annual income; an answer smaller than the income signals a division error.
Common Mistakes to Avoid
- -Dividing income by the multiplier
- -Converting periods when income and multiplier already match
- -Applying a multiplier derived from a different income definition
Concept Deep Dive
Analysis
This question tests applying a gross income multiplier. The multiplier is stated to be based on the same annual income definition and period as the subject's income, so value equals income times the multiplier. The traps involve dividing, changing the period, or misplacing the decimal.
Background Knowledge
A gross income multiplier is derived from comparable sales by dividing sale price by gross income. It is then applied to the subject's income measured the same way, such as annual potential or effective gross income. Mixing income definitions or periods produces an unreliable indication.
Real-World Application
An appraiser valuing a rented triplex derives an annual gross income multiplier from sales of similar 2-4 unit buildings. Confirming the subject's income is measured on the same annual basis, the appraiser multiplies it by that multiplier.
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