An appraiser is valuing a 20-unit apartment building. Recent sales of similar properties show gross rent multipliers ranging from 8.5 to 9.2. If the subject property generates $180,000 in annual gross rent, what is the indicated value range using GRM analysis?
Correct Answer
A) $1,530,000 to $1,656,000
Why this is correct: Gross Rent Multiplier (GRM) analysis estimates value by multiplying the subject's annual gross rent by the market-derived GRM range. Here, annual gross rent is $180,000. Low value = $180,000 × 8.5 = $1,530,000. High value = $180,000 × 9.2 = $1,656,000. Why the other choices are wrong: '$1,350,000 to $1,550,000' uses incorrect multipliers (e.g., 7.5 and 8.61). '$1,440,000 to $1,620,000' mistakenly applies the GRM range to monthly rent ($15,000). '$1,500,000 to $1,600,000' is an approximate range not matching the precise calculation. Exam tip: For GRM, always use annual gross rent unless the multiplier is explicitly stated as monthly.
Why This Is the Correct Answer
Option A correctly applies the GRM formula by multiplying the annual gross rent of $180,000 by both the low and high GRM values from comparable sales. The calculation yields $180,000 × 8.5 = $1,530,000 for the low estimate and $180,000 × 9.2 = $1,656,000 for the high estimate. This straightforward multiplication provides the proper value range based on market data from similar properties.
Why the Other Options Are Wrong
Option B: $1,350,000 to $1,550,000
Option B shows incorrect calculations that don't match the given GRM range when divided by the annual gross rent, suggesting computational errors in applying the GRM formula.
Option C: $1,440,000 to $1,620,000
Option C provides values that would result in GRMs of approximately 8.33 to 8.89 when back-calculated, which falls outside the given comparable sales range of 8.5 to 9.2.
Option D: $1,500,000 to $1,600,000
Option D yields GRMs of approximately 7.5 to 8.6 when back-calculated, with the low end significantly below the comparable sales range, indicating an incorrect application of the method.
GRM = Gross Rent Magic
Remember 'GRM Magic': Grab Recent Multipliers from comparable sales, then Multiply the subject's Annual Gross Income by both the low and high multipliers to Create the value range.
How to use: When you see a GRM question, immediately identify the three components: (1) the GRM range from comparables, (2) the subject's annual gross rent, and (3) multiply each GRM by the rent to get your range.
Exam Tip
Always double-check your multiplication and ensure your final answer range makes sense - the higher GRM should produce the higher value estimate.
Common Mistakes to Avoid
- -Dividing instead of multiplying (using rent ÷ GRM instead of rent × GRM)
- -Using monthly rent instead of annual rent in calculations
- -Selecting GRM values outside the given comparable range
Concept Deep Dive
Analysis
This question tests the application of Gross Rent Multiplier (GRM) analysis, a fundamental income approach method used in commercial real estate valuation. The GRM is a simple ratio that relates a property's sale price to its annual gross rental income, providing a quick market-based valuation tool. When comparable sales show GRM ranges, appraisers multiply the subject property's gross annual rent by both the low and high GRM values to establish a value range. This method assumes that the relationship between gross rent and value is consistent across similar properties in the market.
Background Knowledge
The Gross Rent Multiplier (GRM) is calculated as Sale Price ÷ Annual Gross Rent for comparable properties, then applied to the subject property as GRM × Subject's Annual Gross Rent = Estimated Value. GRM analysis is most reliable when comparable properties are truly similar in terms of location, size, age, condition, and rental characteristics.
Real-World Application
Appraisers use GRM analysis as a quick market check for income-producing properties, especially useful for initial valuations, broker price opinions, and as a reasonableness test against other valuation methods like direct capitalization or discounted cash flow analysis.
More Income Approach Questions
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