In a college town, an appraiser is valuing a four-bedroom home; Comparable 3 is an otherwise similar three-bedroom home. Leases show four-bedroom homes rent for $3,050 per month furnished with the owner paying utilities, while otherwise similar three-bedroom homes rent for $2,400 per month unfurnished with tenants paying utilities. Local property managers report that furniture adds about $200 per month to rent and that owner-paid utilities average $250 per month. Sales of rented homes, all leased unfurnished with tenants paying utilities, show a monthly gross rent multiplier of 150. What adjustment for the fourth bedroom should be made to Comparable 3?
Correct Answer
A) +$30,000
The multiplier was derived from homes rented unfurnished with tenants paying utilities, so the rents being compared must be on that same basis. Taking the $200 furniture and $250 utilities out of the four-bedroom rent gives $3,050 - $200 - $250 = $2,600, a $200 monthly difference from the three-bedroom rent, and $200 x 150 = $30,000, added because Comparable 3 lacks the fourth bedroom. Capitalizing the raw $650 gap gives $97,500, and removing only one of the two items gives $60,000 or $67,500.
Why This Is the Correct Answer
Option A is correct because the four-bedroom rent, restated without furniture and utilities, is $3,050 - $200 - $250 = $2,600. The difference from the $2,400 three-bedroom rent is $200 a month, and at the multiplier of 150 that is $30,000, added to Comparable 3 because it lacks the bedroom the subject has.
Why the Other Options Are Wrong
Option B: +$60,000
Option B, +$60,000, removes the $250 utilities but leaves in the $200 furniture: ($3,050 - $250 - $2,400) x 150 = $60,000. Furniture is personal property, and the multiplier comes from unfurnished rentals, so the correct figure is $200 x 150 = $30,000.
Option C: +$67,500
Option C, +$67,500, removes the $200 furniture but leaves in the owner-paid utilities: ($3,050 - $200 - $2,400) x 150 = $67,500. The multiplier's rents have tenants paying utilities, so the $250 must also come out, leaving $200 x 150 = $30,000.
Option D: +$97,500
Option D, +$97,500, capitalizes the raw $650 gap: $650 x 150 = $97,500. That gap mixes the bedroom with furniture and utilities, which the multiplier's rents do not include, so it overstates the bedroom's contribution.
Match the rent to the multiplier
Strip out whatever the multiplier's rents did not include, such as furniture and owner-paid utilities, before you capitalize a rent difference.
How to use: Use this when the rents in a question come on different lease terms from the rentals that produced the multiplier.
Exam Tip
Look for words like furnished, utilities included or tenant pays in the rent data. Restate every rent on the multiplier's basis before subtracting.
Common Mistakes to Avoid
- -Capitalizing a rent that includes furniture or utilities
- -Adjusting for only one of two lease differences
- -Applying a multiplier to income on a different basis
Concept Deep Dive
Analysis
The question tests consistency in rent capitalization. A multiplier carries the terms of the rents it came from, so any rent it is applied to must be put on the same basis first. Here the four-bedroom rent includes furniture and owner-paid utilities, which the multiplier's rents do not, so both items come out before the difference is capitalized.
Background Knowledge
A gross rent multiplier is the ratio of sale price to gross rent for similar rented properties. It is reliable only when applied to income of the same kind and level as the income from which it was derived, including who pays utilities and whether furnishings are provided. Rents for the properties being compared must be stated on the same basis before the difference is capitalized.
Real-World Application
Near a university, four-bedroom houses are often leased furnished with utilities included, while smaller homes are leased bare. An appraiser restates the furnished rents on an unfurnished, tenant-paid basis using property manager data before capitalizing the bedroom rent premium with a multiplier from unfurnished rental sales.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
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A comparable listed at $389,900 and sold for $374,000. It is 200 square feet smaller than the subject, and paired sales support a +$12,000 adjustment for the difference, giving an adjusted price of $386,000. Its one remaining difference is location: it fronts a busy collector street, while the subject is on a quiet cul-de-sac. No market data measure this location effect. What does this comparable indicate about the subject's value?