An operating expense ratio well below the market norm for that property type suggests:
Correct Answer
D) An expense may have been omitted from the statement
Why this is correct: The Operating Expense Ratio (OER) = Operating Expenses / Effective Gross Income. A ratio well below market norms is a red flag that the expense statement may be incomplete. Common omissions include reserves for replacement, property management fees (if self-managed), or certain maintenance costs. Why the other choices are wrong: "The income figure was understated" would typically inflate the OER, not lower it. "The property is being exceptionally well managed" is possible but less likely than a data error; the appraiser must first verify the expense statement. "The capitalization rate should be reduced" is not directly indicated by a low OER. Exam tip: Always benchmark expense ratios against market data to spot potential omissions or misstatements.
Why This Is the Correct Answer
Why this is correct: The Operating Expense Ratio (OER) = Operating Expenses / Effective Gross Income. A ratio well below market norms is a red flag that the expense statement may be incomplete. Common omissions include reserves for replacement, property management fees (if self-managed), or certain maintenance costs. Why the other choices are wrong: "The income figure was understated" would typically inflate the OER, not lower it. "The property is being exceptionally well managed" is possible but less likely than a data error; the appraiser must first verify the expense statement. "The capitalization rate should be reduced" is not directly indicated by a low OER. Exam tip: Always benchmark expense ratios against market data to spot potential omissions or misstatements.
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam