An appraiser finds a comparable that sold for a cash-equivalent price of $990,000 with annual EGI of $110,000. The subject has annual EGI of $108,000, measured on the same basis. Sales in the market area indicate the subject would sell at the same price-to-income ratio, with no other adjustments. What is the indicated value of the subject, rounded to the nearest dollar?
Correct Answer
A) $972,000
990000 ÷ 110000 × 108000 = 972000. Common errors: using the comparable price without adjusting for income gives $990,000; inverting the income ratio gives $1,008,333; adding the income difference as dollars instead of applying the ratio gives $988,000.
Why This Is the Correct Answer
Option A is correct because the comparable's multiplier is $990,000 ÷ $110,000 = 9.0. Applying it to the subject gives 9.0 × $108,000 = $972,000. The multiplier must be applied to the same level of income from which it was derived, here EGI.
Why the Other Options Are Wrong
Option B: $988,000
Option B, $988,000, comes from adding the income difference as dollars to the price: $990,000 + ($108,000 − $110,000) = $988,000. The ratio must be applied instead: $990,000 ÷ $110,000 × $108,000 = $972,000.
Option C: $990,000
Option C, $990,000, uses the comparable's sale price without adjusting for the subject's lower income. Applying the ratio gives $990,000 ÷ $110,000 × $108,000 = $972,000.
Option D: $1,008,333
Option D, $1,008,333, comes from inverting the income ratio: $990,000 ÷ $108,000 × $110,000 = $1,008,333. The subject's income belongs in the numerator: $990,000 ÷ $110,000 × $108,000 = $972,000.
Price per income dollar
Find how many dollars of price each dollar of income bought at the comparable, then multiply by the subject's income.
How to use: Use this to set up multiplier and rate extraction problems in the right direction.
Exam Tip
A subject with less income than the comparable should show a lower value, so an answer above the comparable price is a sign the ratio was inverted.
Common Mistakes to Avoid
- -Inverting the income ratio when applying it to the subject
- -Adjusting the price by the dollar income difference
- -Applying a multiplier from one income level to a different income level
Concept Deep Dive
Analysis
This question tests extracting a price-to-income ratio from a comparable and applying it to the subject. The ratio is the comparable's price divided by its EGI, and that multiplier is applied to the subject's EGI measured the same way. The wrong answers skip the ratio, invert it, or treat an income difference as a dollar adjustment to price.
Background Knowledge
An effective gross income multiplier equals sale price divided by EGI. It is extracted from comparable sales and applied to the subject's EGI to indicate value. The income definition and period must match between the comparable and the subject.
Real-World Application
An appraiser values a rented duplex using a recent cash-equivalent sale of a similar duplex. The comparable's price divided by its EGI produces a multiplier, which is applied to the subject's EGI calculated the same way. The result is reconciled with other income approach indications.
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
A property has annual NOI of $96,000 and a known land value of $200,000. The land capitalization rate is 7% and the building capitalization rate is 10%. Using the building residual technique, what is the building value?
Next 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?