An appraiser finds a rented comparable that sold for a cash-equivalent price of $648,000 with monthly gross rent of $2,700. The subject has monthly gross rent of $2,450, measured on the same basis. Sales in the market area indicate the same price-to-rent ratio applies, and no other adjustments are required. What is the indicated value of the subject, rounded to the nearest dollar?
Correct Answer
A) $588,000
648000 ÷ 2700 × 2450 = 588000. Common errors: using the comparable price without adjusting for income gives $648,000; inverting the income ratio gives $714,122; adding the income difference as dollars instead of applying the ratio gives $647,750.
Why This Is the Correct Answer
Option A is correct because the comparable's multiplier is $648,000 ÷ $2,700 = 240, and 240 × $2,450 = $588,000. The multiplier is applied to the same type and period of income from which it was derived.
Why the Other Options Are Wrong
Option B: $647,750
Option B, $647,750, comes from adding the dollar rent difference to the comparable price: $648,000 + ($2,450 − $2,700). The rent difference must be scaled by the multiplier, which gives 240 × $2,450 = $588,000.
Option C: $648,000
Option C, $648,000, simply repeats the comparable's price without adjusting for the subject's lower rent. Applying the 240 multiplier to $2,450 gives $588,000.
Option D: $714,122
Option D, $714,122, comes from inverting the income ratio: $648,000 ÷ $2,450 × $2,700. The subject earns less rent than the comparable, so its value should be lower, at $648,000 ÷ $2,700 × $2,450 = $588,000.
Price over rent, times rent
Divide the comparable's price by its rent to get the multiplier, then multiply by the subject's rent; lower subject rent means lower value.
How to use: Use this two-step check on any gross rent multiplier problem.
Exam Tip
Sanity-check direction: if the subject's rent is lower than the comparable's, the indicated value should be lower too.
Common Mistakes to Avoid
- -Inverting the rent ratio so value moves the wrong direction
- -Adding a rent difference in dollars to the price
- -Applying a monthly multiplier to annual rent
Concept Deep Dive
Analysis
This question tests applying a price-to-income ratio (a gross rent multiplier) from a comparable to the subject. Divide the comparable's price by its monthly rent to get the multiplier, then multiply that by the subject's monthly rent on the same basis.
Background Knowledge
A gross rent multiplier is the sale price divided by gross rent, and value is estimated by multiplying the subject's market rent by a multiplier derived from comparables. The multiplier must be applied to the same level and period of income from which it was derived.
Real-World Application
An appraiser valuing a rented single-family home divides each comparable rental's sale price by its monthly rent to derive a GRM, then applies the reconciled GRM to the subject's estimated monthly market rent.
More Income Approach Questions
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