For an owner-occupied house, verified buyer evidence is price-based and rental inputs are materially weaker than the competitive sales evidence. How should a developed income indication be weighted?
Correct Answer
A) Give it limited weight based on its stated weaker relevance and support.
Limited weight follows the stated buyer behavior and weaker rental evidence. Owner occupancy does not universally preclude an income approach; reliable rental-market evidence may make it relevant in another assignment. Explain the treatment rather than applying a fixed property-type rule.
Why This Is the Correct Answer
Option A is correct because weight in reconciliation follows the relevance and support of each indication. Here buyer behavior is price-based and the rental inputs are weaker, so the income approach merits limited weight. Credible results require support by relevant evidence and logic.
Why the Other Options Are Wrong
Option B: Give it dominant weight, since the house could be rented to a tenant instead.
Option B gives the income indication dominant weight because the house could be rented. A possible rental use does not make weaker rental evidence more reliable or reflect how buyers in this market actually price such houses.
Option C: Give it equal weight with the other approaches, since three methods were developed.
Option C gives equal weight because three methods were developed. Reconciliation weighs each indication by its relevance and reliability, not by giving every developed approach the same share.
Option D: Give it whichever weight produces the highest value.
Option D picks whichever weight produces the highest value. That is advocacy for a result, not a supported reconciliation, and it would not produce credible assignment results.
Weight follows the evidence
The stronger and more relevant the data behind an approach, the more weight it earns in reconciliation.
How to use: Use this rule when asked how to weight competing value indications.
Exam Tip
Pick the answer that explains weighting by relevance and data quality; avoid answers based on counting approaches or on outcome.
Common Mistakes to Avoid
- -Weighting approaches equally by default
- -Treating owner occupancy as ruling out an income approach in all cases
- -Choosing weights that favor a target value
Concept Deep Dive
Analysis
This question tests reconciliation: how much weight to give an approach based on its relevance and the quality of its data. Buyers of this owner-occupied house act on prices, and the rental data are materially weaker than the sales data, so the income indication deserves limited weight.
Background Knowledge
In reconciliation, the appraiser considers the quality and quantity of data and the applicability of each approach to the property and its market. When income and expense data are more limited, greater weight is logically given to the sales comparison indication.
Real-World Application
An appraiser values a single-family home in a neighborhood where almost all homes are owner-occupied and only two weak rental comparables exist. The appraiser develops a gross rent multiplier indication but gives it limited weight and explains why.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
An appraiser is reconstructing the operating statement of a suburban office building with effective gross income of $240,000. This year's ledger lists property taxes of $34,000, insurance of $12,000, utilities of $26,000, repairs of $28,000, on-site manager wages of $18,000 and a replacement allowance of $8,000, which buyers of similar buildings also deduct. It also lists $40,000 for repaving the parking lot, charged against that allowance. What is the net operating income?
Next Question
An appraiser is extracting an overall rate for a fourplex. A comparable fourplex sold for a cash equivalent $600,000, with annual PGI of $72,000, vacancy and credit loss of 5%, operating expenses of $20,400 and buyer's mortgage payments of $31,000. The subject property has annual PGI of $84,000, the same 5% loss and operating expenses of $25,000. Neither property has other income. What is the indicated value of the subject property?