An appraiser derives a multiplier from comparables using annual rents, then applies it to the subject's monthly rent. The result is:
Correct Answer
A) Wrong by roughly a factor of twelve
A price-to-annual-rent multiplier must be applied to annual rent on the same income basis. Applying it directly to one month understates the result by a factor of twelve when annual rent is twelve equal monthly amounts. Lease payment frequency and vacancy do not repair the dimensional mismatch.
Why This Is the Correct Answer
Option A is correct because a multiplier must be applied to the same level of income from which it was derived. When annual rent equals twelve equal monthly payments, multiplying an annual-rent multiplier by one month of rent produces a value roughly one-twelfth of the proper figure. The error is a mismatch of units, so the result is wrong by about a factor of twelve.
Why the Other Options Are Wrong
Option B: Slightly conservative but usable
Option B, "slightly conservative but usable," understates the problem. Using monthly rent with an annual-rent multiplier cuts the value to roughly one-twelfth, which is a gross error rather than a slight, usable understatement.
Option C: Correct if the leases are month-to-month
Option C claims the result is correct if the leases are month-to-month. Lease term or payment frequency does not change the fact that the multiplier was built on annual rent, so it still has to be applied to annual rent.
Option D: Correct after adding back vacancy
Option D claims the result becomes correct after adding back vacancy. Vacancy adjusts the income level, but it cannot fix a period mismatch; the multiplier is still being applied to one month instead of a full year of rent.
Same units in, same units out
An annual multiplier eats annual rent and a monthly multiplier eats monthly rent. Feed it the wrong period and the answer is off by twelve.
How to use: Use this check whenever a multiplier and an income figure come from different parts of a problem.
Exam Tip
Before multiplying, confirm the multiplier and the subject income share the same period and income level. Answers that are off by about twelve usually signal a monthly-versus-annual mix-up.
Common Mistakes to Avoid
- -Multiplying an annual-rent multiplier by a single month of rent
- -Assuming lease frequency or vacancy adjustments can correct a period mismatch
- -Treating a twelvefold understatement as a minor conservative bias
Concept Deep Dive
Analysis
This question tests whether you match the income period used to derive a multiplier with the income period it is applied to. A multiplier extracted as price divided by annual rent expresses value per dollar of annual rent, so it must be multiplied by annual rent. Applying it to one month of rent shrinks the indicated value to about one-twelfth of what it should be.
Background Knowledge
A gross rent or gross income multiplier is the ratio of sale price to gross income, extracted from comparable sales. It is only meaningful when the subject's income is stated on the same basis, such as monthly versus annual and potential versus effective, as the income used in the comparables.
Real-World Application
An appraiser extracts an annual gross income multiplier from several small apartment sales, then reads the subject's rent roll, which lists monthly rents. Before applying the multiplier, the appraiser converts the subject's monthly rents to an annual total so the bases match.
More Income Approach Questions
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Previous Question
Annual full-occupancy rent is $120,000. Apply a 5% vacancy and collection loss to rent only. Additional collectible annual laundry income is already effective at $4,800 and receives no further loss deduction. What total EGI results?
Next Question
An appraiser is estimating the market value of the fee simple interest in a four-unit apartment property. Each unit is leased at $1,050 per month, and similar units in competing properties rent for $1,200 per month. Stabilized vacancy and credit loss is 5% of PGI, market operating expenses are $19,720 a year, and the market overall rate is 8%. What is the indicated value?