A supported price-to-income multiplier of 164 is explicitly defined on the same period and income basis as the subject’s $2,650 income. With no further adjustments, what value is indicated by multiplying the two?
Correct Answer
C) $434,600
2650×164 = 434600. Common errors: annualizing the income before applying a multiplier defined on the same basis gives $5,215,200; annualizing the income without applying the multiplier gives $31,800; dividing the result by 12 as if converting it to a monthly figure gives $36,217.
Why This Is the Correct Answer
Option C is correct because $2,650 × 164 = $434,600. A multiplier is applied to the same level and period of income from which it was derived, which the question states is already the case.
Why the Other Options Are Wrong
Option A: $31,800
Option A, $31,800, is $2,650 × 12, which annualizes the income and never applies the 164 multiplier. The value is $2,650 × 164 = $434,600.
Option B: $36,217
Option B, $36,217, comes from multiplying correctly and then dividing by 12 ($2,650 × 164 ÷ 12) as if converting value to a monthly figure. Value is not a monthly amount, so the answer is $434,600.
Option D: $5,215,200
Option D, $5,215,200, comes from annualizing the income first ($2,650 × 12 × 164). Since the multiplier is already defined on the same basis as the $2,650, annualizing applies the wrong period and overstates value; the correct value is $434,600.
Same basis, straight multiply
If the multiplier and income share the same period, multiply them directly with no conversions.
How to use: Use this check before converting monthly and annual figures in a multiplier problem.
Exam Tip
Look for a statement that the multiplier and income are on the same basis; when it is there, extra conversions create wrong answers.
Common Mistakes to Avoid
- -Annualizing monthly income before applying a monthly multiplier
- -Dividing the indicated value by 12
- -Forgetting to apply the multiplier at all
Concept Deep Dive
Analysis
This question tests applying a gross income multiplier to income on the same basis. Because the multiplier is defined on the same period and income basis as the $2,650, no annualizing or monthly conversion is needed; just multiply.
Background Knowledge
Gross income multipliers and gross rent multipliers are derived by dividing sale prices by gross income. They are valid only when applied to the same type and period of income used to derive them, such as monthly rent with a monthly multiplier.
Real-World Application
An appraiser derives a monthly gross rent multiplier from sales of rented homes and applies it directly to the subject's estimated monthly market rent, being careful not to annualize the rent first.
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