A rented comparable sold for a cash-equivalent price of $441,000 with monthly gross rent of $2,100. The subject has monthly gross rent of $2,250, measured on the same basis. The market indicates the subject would sell at the same price-to-rent ratio, with no other adjustments. What is the subject's indicated value, rounded to the nearest dollar?
Correct Answer
D) $472,500
441000 ÷ 2100 × 2250 = 472500. Common errors: using the comparable price without adjusting for income gives $441,000; inverting the income ratio gives $411,600; adding the income difference as dollars instead of applying the ratio gives $441,150.
Why This Is the Correct Answer
Option D is correct because $441,000 / $2,100 = 210, and $2,250 x 210 = $472,500. The multiplier is applied to the same monthly gross rent basis from which it was derived. The subject's higher rent produces a higher value than the comparable.
Why the Other Options Are Wrong
Option A: $411,600
Option A is wrong because $411,600 comes from inverting the income ratio: $441,000 / $2,250 x $2,100 = $411,600. The correct calculation is $441,000 / $2,100 x $2,250 = $472,500.
Option B: $441,000
Option B is wrong because $441,000 is the comparable price used without adjusting for the subject's higher rent. Applying the GRM gives $441,000 / $2,100 x $2,250 = $472,500.
Option C: $441,150
Option C is wrong because $441,150 comes from adding the $150 rent difference as dollars: $441,000 + ($2,250 - $2,100) = $441,150. The ratio must be applied: $441,000 / $2,100 x $2,250 = $472,500.
More rent, more value
If the subject rents for more than the comparable at the same GRM, its value must exceed the comparable price.
How to use: Use this direction check to reject an inverted ratio.
Exam Tip
Extract the GRM first, then multiply by subject rent. A result below the comparable price when subject rent is higher signals an inversion.
Common Mistakes to Avoid
- -Inverting the rent ratio
- -Adding the rent difference to the price
- -Applying a monthly GRM to annual rent
Concept Deep Dive
Analysis
This question tests extracting and applying a monthly gross rent multiplier. The comparable's GRM is $441,000 / $2,100 = 210. Applying it to the subject's $2,250 monthly rent gives $472,500.
Background Knowledge
In residential appraisal, the income approach often uses estimated monthly market rent times a gross rent multiplier. The GRM is extracted from comparable sales of rented properties by dividing price by monthly rent. It must be applied to the subject's rent on the same basis.
Real-World Application
An appraiser finds a rented house that sold for $441,000 while renting at $2,100 a month. Applying the 210 GRM to the subject's $2,250 market rent indicates about $472,500 by the income approach.
More Income Approach Questions
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Annual PGI is $500,000. Vacancy loss is 5% of PGI and additional collection loss is 1.5% of that same PGI base. There is no other income. What annual effective gross income results?