For a stabilized market-value income model, how should vacancy and collection loss be estimated?
Correct Answer
C) Analyze relevant current market evidence together with the subject’s characteristics and history.
Consider competitive evidence and the subject’s actual characteristics and history to estimate supported expected loss. A stabilized estimate is not necessarily identical to an area average, and subject-specific problems cannot be ignored. No universal vacancy percentage or underwriting minimum supplies a market estimate.
Why This Is the Correct Answer
Option C is correct because a supported vacancy and collection allowance comes from analyzing relevant current market evidence together with the subject's characteristics and history. The recent history of the subject and comparable properties is the starting point. A stabilized estimate need not equal an area average, and subject-specific problems should not be ignored.
Why the Other Options Are Wrong
Option A: Use the subject’s best historical vacancy year as the allowance, without further analysis.
Option A, using the subject's best historical vacancy year without further analysis, is wrong because one favorable year may not represent expected stabilized loss and ignores current market evidence.
Option B: Apply a fixed 5% to each property and market, without analyzing any market evidence.
Option B, applying a fixed 5% to every property and market without analyzing evidence, is wrong because no universal vacancy percentage supplies a market estimate; vacancy varies by market and property.
Option D: Substitute a loan program’s minimum vacancy factor for the analysis, without evaluating evidence.
Option D, substituting a loan program's minimum vacancy factor for the analysis, is wrong because an underwriting minimum is a lending rule, not a market-supported estimate of expected loss.
Market plus subject equals vacancy
Look outward at competing properties and inward at the subject's own record; the supported allowance comes from both.
How to use: Use this to reject answer choices that rely on a single number with no analysis.
Exam Tip
Prefer answers that call for analyzing market evidence and subject data over answers that rely on a fixed rule or a single historical figure.
Common Mistakes to Avoid
- -Using the subject's lowest vacancy year as the stabilized rate
- -Applying a standard percentage without market support
- -Adopting a lender's underwriting factor as the market vacancy estimate
Concept Deep Dive
Analysis
This question tests how a supported vacancy and collection loss estimate is developed for a stabilized market-value model. The estimate should reflect what the market indicates for competitive properties, adjusted for the subject's own characteristics and history. Shortcuts that skip analysis of evidence do not produce a supported market estimate.
Background Knowledge
Vacancy and collection loss is an annual allowance for income lost to vacancy, tenant turnover and nonpayment. Appraisers estimate it from the subject's recent history, comparable properties and current market conditions. The estimate should fit the stabilized income model and the rate or multiplier used.
Real-World Application
An appraiser values an older fourplex whose owner reports almost no vacancy in one strong year. Surveys of competing rentals show higher typical turnover, and the subject has some deferred maintenance. The appraiser sets a stabilized allowance that reflects both the market data and the subject's condition.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
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Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
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Previous Question
A lender will fund 70% of value at an annual mortgage constant of 8%. The remaining equity requires an annual equity dividend rate of 12%. Annual NOI is $92,000. Using the band of investment to develop the overall rate, what value is indicated, rounded to the nearest dollar?
Next Question
An overall capitalization rate of 7.2% was extracted from a sale. The buyer financed 75% of the price at a 6.9% annual mortgage constant and paid the remaining 25% in equity. Using the band of investment, what equity dividend rate is indicated?