An owner's expense statement shows no management fee because the owner manages personally. What does the appraiser do?
Correct Answer
D) Impute a market management fee anyway
Why this is correct: For market-based valuation, expenses must be normalized to reflect typical market costs, regardless of actual owner practices. If the owner manages personally, a market-level management fee should still be imputed (added) to the expenses to reflect what a typical buyer would incur. Why the other choices are wrong: "Accept the statement, since it reflects actual cash flow" ignores that value is based on market expectations, not idiosyncratic owner savings. "Note the saving as a benefit of the property" mischaracterizes owner labor as a property attribute. "Reduce vacancy loss to offset the difference" incorrectly links unrelated expense items. Exam tip: Always normalize expenses to market standards in the income approach, even if the owner's actual expenses differ.
Why This Is the Correct Answer
Why this is correct: For market-based valuation, expenses must be normalized to reflect typical market costs, regardless of actual owner practices. If the owner manages personally, a market-level management fee should still be imputed (added) to the expenses to reflect what a typical buyer would incur. Why the other choices are wrong: "Accept the statement, since it reflects actual cash flow" ignores that value is based on market expectations, not idiosyncratic owner savings. "Note the saving as a benefit of the property" mischaracterizes owner labor as a property attribute. "Reduce vacancy loss to offset the difference" incorrectly links unrelated expense items. Exam tip: Always normalize expenses to market standards in the income approach, even if the owner's actual expenses differ.
More income-approach Questions
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Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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