The subject property, a rental house leased at $2,400 per month, was listed at $528,000 and is under contract for $561,000. Its market rent is $2,550 per month. Sales of similar rental houses show monthly gross rent multipliers of 210 to 230, calculated on market rent. What multiplier does the contract price indicate, and how does it compare with the range?
Correct Answer
D) 220; within the range
To match the sales, the contract price is divided by market rent: $561,000 ÷ $2,550 = 220, which is inside the 210 to 230 range. Using the $2,400 lease rent gives about 234, a mismatch because the sales are on market rent. Using the $528,000 list price gives about 207, which tests the wrong price. Dividing by annual rent gives about 18.3, an annual figure that cannot be set against a monthly range.
Why This Is the Correct Answer
Option D is correct because the sales are stated on monthly market rent, so the test is $561,000 ÷ $2,550 = 220. That falls within the 210 to 230 range, so the contract price is consistent with this multiplier evidence.
Why the Other Options Are Wrong
Option A: 18.3; below the range
Option A's 18.3 comes from annual rent: $561,000 ÷ ($2,550 × 12) = 18.33. That is an annual multiple and cannot be compared with a monthly range; on the monthly basis the figure is $561,000 ÷ $2,550 = 220.
Option B: 207; below the range
Option B's 207 uses the list price: $528,000 ÷ $2,550 = 207. The test concerns the contract price, and $561,000 ÷ $2,550 = 220 is inside the range.
Option C: 234; above the range
Option C's 234 uses the lease rent: $561,000 ÷ $2,400 = 233.75. The sales multipliers are based on market rent, so matching them gives $561,000 ÷ $2,550 = 220, which is inside the range.
Build It Like the Sales
Before you divide, ask how the market multipliers were built, then use the same kind of price, rent and period for the subject.
How to use: Use this check when testing any price against a range of market multipliers.
Exam Tip
When two prices and two rents are given, write the fraction on the basis of the market evidence. The other figures are not part of that test.
Common Mistakes to Avoid
- -Using the list price instead of the contract price
- -Mixing lease rent with multipliers based on market rent
- -Comparing an annual multiple with a monthly range
Concept Deep Dive
Analysis
Rather than producing a value, the analysis uses the multiplier as a reasonableness check on a price. The implied multiplier must be built the same way as the market evidence, with the contract price over monthly market rent. Each wrong answer changes one piece of that fraction.
Background Knowledge
An implied multiplier can be compared with market multipliers to see whether a price is in line with the evidence. The comparison is meaningful only when the income definition and period match. A multiplier test is one check among others and does not by itself establish value.
Real-World Application
A lender's reviewer asks whether a contract price above list is reasonable for a rental house. The appraiser computes the implied multiplier on market rent and shows that it falls within the range of sales, while noting that the lease rent is below market.
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An appraiser is analyzing the cash sale of a fourplex for $645,000. At the time of sale, the buyer anticipated potential rental income of $60,000 per year and potential parking and laundry income of $4,500 per year, with vacancy and collection loss of 5%. What is the potential gross income multiplier indicated by this sale?
Next Question
An appraiser is developing an overall rate for a subject 12-unit apartment building, for which typical financing is a 70% loan-to-value ratio. A comparable 12-unit building sold for $800,000 with a $600,000 market-rate loan. Its net operating income was $62,000 and its annual debt service was $42,000. Based on the mortgage constant and equity dividend rate from this sale, what overall rate does the band of investment indicate for the subject?