An owner self-manages a fourplex and reports zero management expense. The appraiser should:
Correct Answer
B) Add a market-rate management fee to expenses anyway
Why this is correct: NOI must reflect typical market expenses a prudent investor would incur. Even if an owner self-manages and reports no cost, a market-rate management fee must be included in expenses to avoid overstating NOI and value. Why the other choices are wrong: "Accept the statement as the owner's actual history" would misstate the property's market-derived income potential. "Deduct the owner's hourly wage from income" is not a standard appraisal practice. "Reclassify management as a capital cost" is incorrect; management is an operating expense. Exam tip: Always use market-standard expenses for NOI, even if the current owner's costs differ.
Why This Is the Correct Answer
Why this is correct: NOI must reflect typical market expenses a prudent investor would incur. Even if an owner self-manages and reports no cost, a market-rate management fee must be included in expenses to avoid overstating NOI and value. Why the other choices are wrong: "Accept the statement as the owner's actual history" would misstate the property's market-derived income potential. "Deduct the owner's hourly wage from income" is not a standard appraisal practice. "Reclassify management as a capital cost" is incorrect; management is an operating expense. Exam tip: Always use market-standard expenses for NOI, even if the current owner's costs differ.
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