An appraiser is valuing a property that generates $8,000 per month in gross rent. Recent sales of similar properties show gross rent multipliers ranging from 110 to 130. What is the indicated value range using GRM analysis?
Correct Answer
B) $1,056,000 to $1,248,000
Monthly gross rent = $8,000. Value range = $8,000 × 110 to $8,000 × 130 = $880,000 to $1,040,000. However, annual rent is $96,000, so the range is $96,000 × 11 to $96,000 × 13 = $1,056,000 to $1,248,000.
Why This Is the Correct Answer
Option B is correct because it properly applies annual GRM analysis. The monthly rent of $8,000 converts to annual rent of $96,000 ($8,000 × 12). When GRMs of 110-130 are applied to comparable sales, these are typically annual multipliers in this range. Therefore, the calculation becomes $96,000 × 11 to $96,000 × 13 = $1,056,000 to $1,248,000. The explanation in the question confirms this by showing both the incorrect monthly calculation and the correct annual calculation.
Why the Other Options Are Wrong
Option A: $880,000 to $1,040,000
Option A represents the incorrect application of monthly GRM analysis ($8,000 × 110 to $8,000 × 130). This treats the GRM range of 110-130 as monthly multipliers, which would be unusually high for monthly GRMs and inconsistent with typical market practice where such ranges represent annual multipliers.
Option C: $96,000 to $104,000
Option C appears to confuse the rental income figures themselves ($96,000 annual rent) with the final property value, showing a fundamental misunderstanding of the GRM calculation process.
Option D: $72,727 to $87,273
Option D seems to involve an incorrect mathematical approach, possibly attempting to divide rather than multiply, or using an inappropriate conversion factor that doesn't align with standard GRM methodology.
GRM Time Match Rule
Remember 'MATCH THE BATCH' - Monthly rent needs Monthly GRM, Annual rent needs Annual GRM. If GRM numbers are 100+, they're usually Annual multipliers. Monthly GRMs typically range from 8-15.
How to use: When you see a GRM problem, first identify if the given rent is monthly or annual, then determine if the GRM range suggests monthly (usually 8-15) or annual (usually 100+) multipliers. Convert the rent to match the GRM period before calculating.
Exam Tip
Always check the time period consistency between rental income and GRM. If you see GRM ranges above 100, they're almost always annual multipliers, so convert monthly rent to annual rent first.
Common Mistakes to Avoid
- -Mixing monthly rent with annual GRM or vice versa
- -Assuming all GRMs are monthly without checking the typical range
- -Forgetting to convert between monthly and annual figures before applying the multiplier
Concept Deep Dive
Analysis
This question tests the application of Gross Rent Multiplier (GRM) analysis, which is a quick valuation method used in income property appraisal. The key concept being tested is the proper conversion between monthly and annual rental income when applying GRM ranges. GRM analysis involves multiplying the gross rental income by a market-derived multiplier to estimate property value. The critical understanding required is that GRMs can be expressed as either monthly or annual multipliers, and the appraiser must ensure consistency between the rental income period and the multiplier period.
Background Knowledge
Gross Rent Multiplier (GRM) is calculated as Sale Price ÷ Gross Rental Income, and can be expressed as either monthly or annual multipliers. When applying GRM to estimate value, you multiply the subject property's gross rental income by the appropriate market-derived GRM. It's crucial to maintain consistency between the time period of the rental income and the GRM being applied.
Real-World Application
In practice, appraisers collect GRM data from comparable sales and must be careful about whether market participants quote monthly or annual GRMs. Commercial properties often use annual GRMs while residential income properties might use monthly GRMs, depending on local market customs.
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