An appraiser is analyzing four sales of rental houses with monthly gross rent multipliers of 147, 190, 195 and 200. Verification reveals the 147 sale was a discounted transfer between family members; the others were open-market sales of similar houses. The subject’s market rent is $2,600 per month, and the appraiser concludes to the average of the sales that reflect market value. What is the indicated value?
Correct Answer
D) $507,000
The discounted family transfer is not a market-value sale, so it is removed. The other three average (190 + 195 + 200) ÷ 3 = 195, and $2,600 × 195 = $507,000. Keeping all four gives an average of 183 and $475,800. Using the lowest open-market multiplier alone gives 190 and $494,000, which is not the average the appraiser concluded to. Using the 147 sale alone gives $382,200.
Why This Is the Correct Answer
Option D is correct because a sale used to derive a multiplier must meet the conditions of a market-value transaction. Removing the family sale leaves 190, 195 and 200, which average 195. The indicated value is $2,600 × 195 = $507,000.
Why the Other Options Are Wrong
Option A: $382,200
Option A, $382,200, relies on the family sale alone: $2,600 × 147 = $382,200. That is the one sale that does not qualify; the qualifying sales give $2,600 × 195 = $507,000.
Option B: $475,800
Option B, $475,800, averages all four sales: (190 + 195 + 200 + 147) ÷ 4 = 183, and $2,600 × 183 = $475,800. The non-market sale drags the average down; the correct figure is $2,600 × 195 = $507,000.
Option C: $494,000
Option C, $494,000, uses only the lowest open-market multiplier: $2,600 × 190 = $494,000. The appraiser concluded to the average of the three qualifying sales, 195, so the value is $2,600 × 195 = $507,000.
Screen Before You Average
Verify the sale first and do the arithmetic second. An average is only as good as the sales allowed into it.
How to use: Use this order when verification turns up an unusual circumstance in one of several sales.
Exam Tip
When one data point differs sharply and verification gives a reason, decide whether the sale qualifies before calculating. Do not reject an outlier for its size alone; look for the verified reason.
Common Mistakes to Avoid
- -Averaging in a related-party sale
- -Using one qualifying sale instead of the average of all qualifying sales
- -Rejecting a low multiple without verifying why it is low
Concept Deep Dive
Analysis
A multiplier is market evidence only if the sale behind it is a market transaction. The family transfer's price reflects the relationship between the parties, so its multiplier says little about what buyers pay for rent. The sale should be screened out first and the arithmetic done afterward.
Background Knowledge
Market-derived multipliers and rates depend on arm's-length sales of comparable property. Transfers between related parties can involve prices that do not reflect open-market behavior, so verifying sale conditions is part of the analysis.
Real-World Application
An appraiser notices one rental sale with an unusually low multiplier. A call to the closing agent shows the buyer was the seller's son at a discounted price, so the sale is excluded from the multiplier analysis and noted in the workfile.
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