A supported price-to-income multiplier of 120 is explicitly defined on the same period and income basis as the subject’s $3,500 income. With no further adjustments, what value is indicated by multiplying the two?
Correct Answer
C) $420,000
3500×120 = 420000. Common errors: annualizing the income before applying a multiplier defined on the same basis gives $5,040,000; annualizing the income without applying the multiplier gives $42,000; dividing the result by 12 as if converting it to a monthly figure gives $35,000.
Why This Is the Correct Answer
Option C is correct because $3,500 × 120 = $420,000. The multiplier is defined on the same period and income basis as the subject's income, so it is applied directly.
Why the Other Options Are Wrong
Option A: $35,000
Option A, $35,000, comes from multiplying correctly and then dividing by 12 ($3,500 × 120 ÷ 12) as if converting value to a monthly figure. Value is not monthly, so the answer is $420,000.
Option B: $42,000
Option B, $42,000, is $3,500 × 12, which annualizes the income and never applies the 120 multiplier. The correct value is $3,500 × 120 = $420,000.
Option D: $5,040,000
Option D, $5,040,000, comes from annualizing the income first ($3,500 × 12 × 120). Because the multiplier already matches the $3,500 income basis, annualizing overstates value; the correct value is $420,000.
Same basis, straight multiply
When the multiplier and income share a period, multiply directly without converting either one.
How to use: Use this rule before deciding whether to annualize income in a multiplier problem.
Exam Tip
Answers that differ by a factor of 12 usually signal a period-mismatch error; confirm the stated basis before converting.
Common Mistakes to Avoid
- -Annualizing income when the multiplier is already on the same basis
- -Dividing the value result by 12
- -Treating annualized rent as the value
Concept Deep Dive
Analysis
This question tests applying a multiplier to income already on the same period and basis. No conversion is needed: multiply the $3,500 income by 120.
Background Knowledge
Gross income multipliers convert income to value by multiplication, and they work only when the multiplier and income share the same type and period of income. Mixing monthly and annual figures produces large errors.
Real-World Application
An appraiser applies a monthly GRM derived from comparable rented condominiums to a subject unit's monthly market rent to produce the income approach indication.
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