The subject property has monthly gross rent of $2,280. A rented comparable sold for a cash-equivalent price of $564,000 with monthly gross rent of $2,400. Sales in the market area indicate the same price-to-rent ratio applies to the subject, and no other adjustments are needed. What is the subject's indicated value, to the nearest dollar?
Correct Answer
A) $535,800
564000÷2400×2280 = 535800. Common errors: inverting the income ratio (comparable income ÷ subject income) gives $593,684; using the comparable price without adjusting for the income difference gives $564,000; adding the income difference dollar-for-dollar to the comparable price gives $563,880.
Why This Is the Correct Answer
Option A is correct because the comparable's multiplier is $564,000 ÷ $2,400 = 235, and applying it to the subject gives $2,280 × 235 = $535,800. The same ratio applies with no other adjustments.
Why the Other Options Are Wrong
Option B: $563,880
Option B, $563,880, is wrong because it adds the rent difference dollar-for-dollar to the comparable price: $564,000 + ($2,280 − $2,400) = $563,880. A rent difference must be capitalized through the multiplier, giving $564,000 ÷ $2,400 × $2,280 = $535,800.
Option C: $564,000
Option C, $564,000, is wrong because it uses the comparable price without adjusting for the subject's lower rent. Applying the comparable's ratio to the subject's $2,280 rent gives $535,800.
Option D: $593,684
Option D, $593,684, is wrong because it inverts the income ratio, using comparable rent divided by subject rent: $564,000 × $2,400 ÷ $2,280 = $593,684. The correct ratio is subject rent over comparable rent, giving $564,000 × $2,280 ÷ $2,400 = $535,800.
Lower Rent, Lower Value
With one shared multiplier, value moves in the same direction as rent, so a subject with lower rent must get a lower value.
How to use: Use this direction check to rule out inverted-ratio answers.
Exam Tip
Compute the multiplier from the comparable first, then apply it to the subject. Check that the subject's value moves in the same direction as its rent.
Common Mistakes to Avoid
- -Inverting the ratio of subject rent to comparable rent
- -Adding the rent difference directly to the comparable price
- -Using the comparable's price without any income adjustment
Concept Deep Dive
Analysis
This question tests extracting a price-to-income ratio from a comparable and applying it to the subject. The comparable's price divided by its monthly rent gives the multiplier, and multiplying the subject's monthly rent by that multiplier gives value. Because the subject rents for less, its indicated value should be below the comparable's price.
Background Knowledge
A gross rent multiplier is extracted by dividing a comparable's sale price by its gross rent and applied to the subject's rent on the same basis. Residential income approaches often use estimated monthly market rent times the multiplier. Value moves in proportion to income when the same multiplier applies.
Real-World Application
An appraiser finds a rented single-family comparable that sold recently and calculates its gross rent multiplier. The subject's slightly lower market rent, multiplied by that multiplier, gives an income approach indication a bit below the comparable's price.
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
An appraiser is valuing a rental house near a university. It rents for $3,000 per month during the nine-month academic year and $1,000 per month during the three summer months. A similar nearby rental house recently sold for $420,000. That house rents for $3,000 per month during the academic year and $2,200 per month during the summer. Operating expenses for the two houses are similar. What is the indicated value of the subject by gross income multiplier?
Next Question
An appraiser finds a sale of a retail building at 12.0 times annual NOI, with a 15-year lease to a national tenant. The subject property is a similar retail building with the same NOI, leased on short terms to local tenants with higher turnover. Compared with the sale, how should the subject's NOI multiplier and overall rate differ?