Comparable single-house rentals have similar vacancy and expenses, and verified market evidence shows buyers use gross-rent multiples. Why may GRM be useful here?
Correct Answer
B) It matches the stated market pricing behavior and comparable income economics.
Market use of price-to-rent multiples and comparable operating characteristics can support a GRM in this scenario. Thin expense evidence alone does not prove reliability, and no rule prohibits cap rates for fewer than five units. Select the technique using its actual support.
Why This Is the Correct Answer
Option B is correct because the comparables share similar vacancy and expense patterns and verified market evidence shows buyers price these houses using gross-rent multiples. Under those conditions a GRM reflects actual market behavior and comparable income economics. Gross multipliers are most reliable when the comparable sales closely resemble the subject.
Why the Other Options Are Wrong
Option A: Capitalization rates are legally prohibited for properties with fewer than five units.
Option A claims capitalization rates are legally prohibited for properties with fewer than five units. No such prohibition exists; the choice of technique depends on market support, not a unit-count rule.
Option C: It models the financing terms of each sale.
Option C says the GRM models the financing terms of each sale. A GRM is a simple price-to-rent ratio and does not model financing; sale prices should be cash equivalent before multipliers are extracted.
Option D: Houses appreciate faster than apartments.
Option D says houses appreciate faster than apartments. That broad claim is unsupported and has nothing to do with whether a GRM reflects market pricing for these rentals.
Similar comps, similar multipliers
A GRM is trustworthy when comparables share the subject's income and expense profile and buyers really use it.
How to use: Use this test whenever deciding if a gross multiplier fits the assignment.
Exam Tip
Choose answers that tie a technique to market evidence and comparability rather than to invented legal rules or broad market claims.
Common Mistakes to Avoid
- -Believing small residential rentals cannot be valued with cap rates
- -Using a GRM when comparables have very different expense levels
- -Extracting multipliers from sales that are not cash equivalent
Concept Deep Dive
Analysis
This question tests when a gross rent multiplier is an appropriate technique. A GRM works best when comparables are very similar to the subject and the market actually prices properties that way. The scenario states both conditions, so the answer ties the technique to that support.
Background Knowledge
Gross rent multipliers relate sale price to gross rent without separately analyzing expenses. They are easy to apply but are reliable only when comparables are very similar to the subject, so that differences in vacancy and expenses do not distort the ratio. Market evidence that buyers use the measure strengthens its relevance.
Real-World Application
An appraiser valuing a rented house in a neighborhood of similar rentals interviews investors who confirm they price homes by monthly rent multiples. With comparable rented sales showing similar vacancy and expenses, she gives weight to a GRM indication.
More Income Approach Questions
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Previous Question
The subject property has annual NOI of $112,000. Comparable sales indicate a price-to-income multiplier of 12.5, based on annual NOI. What is the indicated value?
Next Question
The subject property is a fourplex. The owner's statement shows EGI of $60,000 and NOI of $38,000. It includes a $6,000 storm repair that is not expected to recur and no management expense because the owner self-manages. Management for similar fourplexes runs 8% of EGI. Recent sales of similar fourplexes indicate an overall rate of 6%. What is the indicated value?