A comparable sold for a cash-equivalent price of $960,000 and has annual NOI of $80,000. The subject property has annual NOI of $75,000, measured on the same basis. The market indicates the same price-to-income ratio applies to the subject, and no other adjustments are needed. What is the subject's indicated value, rounded to the nearest dollar?
Correct Answer
A) $900,000
960000 ÷ 80000 × 75000 = 900000. Common errors: using the comparable price without adjusting for income gives $960,000; inverting the income ratio gives $1,024,000; adding the income difference as dollars instead of applying the ratio gives $955,000.
Why This Is the Correct Answer
Option A is correct because the comparable's price-to-NOI ratio is $960,000 ÷ $80,000 = 12.0, which is the inverse of an 8.33% overall rate. Applying it to the subject gives 12.0 × $75,000 = $900,000. The ratio is applied to the same level of income from which it was derived.
Why the Other Options Are Wrong
Option B: $955,000
Option B, $955,000, comes from adding the income difference as dollars to the price: $960,000 + ($75,000 − $80,000) = $955,000. Applying the ratio gives $960,000 ÷ $80,000 × $75,000 = $900,000.
Option C: $960,000
Option C, $960,000, uses the comparable's sale price without adjusting for the subject's lower NOI. Applying the ratio gives $960,000 ÷ $80,000 × $75,000 = $900,000.
Option D: $1,024,000
Option D, $1,024,000, comes from inverting the income ratio: $960,000 ÷ $75,000 × $80,000 = $1,024,000. The subject's NOI belongs in the numerator: $960,000 ÷ $80,000 × $75,000 = $900,000.
Price per income dollar
Find how many dollars of price each dollar of NOI bought at the comparable, then multiply by the subject's NOI.
How to use: Use this to set up rate and multiplier extraction problems in the right direction.
Exam Tip
A subject with less NOI than the comparable should indicate a lower value, so an answer above the comparable price signals an inverted ratio.
Common Mistakes to Avoid
- -Inverting the ratio when applying it to the subject
- -Adjusting price by the dollar difference in NOI
- -Mixing an NOI-based ratio with the subject's gross income
Concept Deep Dive
Analysis
This question tests extracting an implied overall rate, or price-to-NOI ratio, from a comparable sale and applying it to the subject. The comparable's price divided by its NOI gives a multiplier, which is applied to the subject's NOI measured the same way. The wrong answers ignore, invert or misapply the ratio.
Background Knowledge
A market-derived overall rate equals net income divided by a cash-equivalent sale price. Its inverse is a price-to-NOI multiplier. Applying either to the subject's NOI on the same income basis gives the same indicated value.
Real-World Application
An appraiser finds a recent cash-equivalent sale of a similar fourplex with documented NOI. Dividing NOI by price gives an overall rate that the appraiser applies to the subject's NOI. The result is checked against rates from other sales and investor surveys.
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
The subject property has annual EGI of $96,000. Expenses other than management total $24,000, and management is an additional 5% of EGI. There are no other deductions. Using an 8% overall rate, what value is indicated by direct capitalization?
Next Question
An appraiser is reconstructing the operating statement of a duplex from the owner's statement for the first nine months of the year. It shows rent collected of $40,500; utilities and routine maintenance, paid monthly, of $5,400; the annual property tax bill, paid in full, of $6,000; the annual insurance premium, paid in full, of $2,400; and mortgage payments of $9,900. Rents and monthly costs have been level and are typical of the market, and no other income or expense is expected. What is the annual net operating income?