The subject property has annual EGI of $108,000. Sales of similar properties indicate a price-to-income multiplier of 8.25, calculated on annual EGI. What is the indicated value?
Correct Answer
C) $891,000
108000×8.25 = 891000. Common errors: dividing the result by 12 as if a monthly figure were needed gives $74,250; dividing by the multiplier instead of multiplying gives $13,091; misplacing the decimal in the multiplier gives $8,910,000.
Why This Is the Correct Answer
Option C is correct because value equals income times the multiplier: $108,000 × 8.25 = $891,000. The multiplier was derived from annual EGI, matching the subject's income definition and period.
Why the Other Options Are Wrong
Option A: $13,091
Option A, $13,091, comes from dividing by the multiplier instead of multiplying: $108,000 ÷ 8.25 = $13,091. The correct value is $108,000 × 8.25 = $891,000.
Option B: $74,250
Option B, $74,250, comes from treating the annual EGI as monthly and dividing the result by 12: $108,000 × 8.25 ÷ 12 = $74,250. The multiplier and income are both annual, so the value is $891,000.
Option D: $8,910,000
Option D, $8,910,000, comes from misplacing the decimal in the multiplier: $108,000 × 82.5 = $8,910,000. Using 8.25 gives $891,000.
Extracted by division, applied by multiplication
A multiplier is found by dividing price by income and used by multiplying income by the multiplier. The two steps mirror each other.
How to use: Use this when switching between extracting a multiplier and applying it.
Exam Tip
Confirm that the multiplier and the subject income share the same definition and period before multiplying.
Common Mistakes to Avoid
- -Dividing income by the multiplier
- -Applying an EGI multiplier to PGI or NOI
- -Converting annual income to monthly when the multiplier is annual
Concept Deep Dive
Analysis
This question tests applying an income multiplier to the subject's income. The multiplier is based on the same EGI definition and period, so value is simply EGI times the multiplier. The distractors come from dividing, converting to monthly, or misplacing the decimal.
Background Knowledge
An income multiplier is applied to the same level of income from which it was derived. An EGI multiplier is applied to EGI, and a PGI multiplier to PGI. Matching the income definition and period keeps the value indication consistent with the market evidence.
Real-World Application
An appraiser derives an EGI multiplier of 8.25 from sales of similar small apartment buildings. Applying it to the subject's $108,000 of annual EGI gives an indicated value of $891,000.
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Comparable income-property sales suggest capitalization rates from 6.2% to 7.8%. What should support selection of a rate for the subject property?