The subject property is a triplex whose tenants pay all utilities. All recent sales of similar triplexes have owner-paid utilities, so those buildings collect higher rents and carry higher operating expenses. The gross rent multiplier from those sales indicates $365,000 for the subject, and the overall rate from the same sales, applied to the subject's NOI, indicates $405,000. No other adjustments are needed. Which reconciliation of the income approach is best?
Correct Answer
D) Favor the overall rate, because NOI reflects the difference in who pays utilities
A gross multiplier assumes the subject and the sales turn gross rent into net income in similar proportions. Here the sales' higher rents pay for utilities the owner covers, so their multiplier understates a subject with lower rent and lower expenses. NOI already reflects who pays utilities, so the overall rate result deserves the most weight. Averaging gives equal validity to a flawed result, and the subject's lower rent is not a reason to cut a value based on its net income.
Why This Is the Correct Answer
Option D is correct because NOI is measured after the owner pays operating expenses, so the overall rate result already reflects who pays utilities. A gross rent multiplier from owner-paid buildings carries an expense burden the subject does not have, which leaves it understating the subject. The overall rate indication therefore deserves the most weight.
Why the Other Options Are Wrong
Option A: Favor the multiplier, because gross rents are easier to verify than expenses
Option A favors the multiplier because gross rents are easier to verify. Ease of verification does not repair the mismatch: the sales' gross rents include an amount that pays for utilities, while the subject's rents do not, so the multiplier does not transfer.
Option B: Average the two results, because both come from the same group of sales
Option B averages the two results because they come from the same sales. Sharing a data set does not make the two measures equally valid here, and a simple average gives weight to a multiplier that does not fit the subject's lease structure.
Option C: Reduce the overall-rate result, because the subject's rents are below the sales' rents
Option C reduces the overall-rate result because the subject's rents are below the sales' rents. The lower rent is matched by lower owner expenses, and the subject's NOI already accounts for both, so a further cut would count the rent difference twice.
Gross misses, net measures
A gross measure does not see who pays the bills, while a net measure does. When the bills differ, lean on the net measure.
How to use: Use this when a multiplier and an overall rate disagree and the lease structures differ.
Exam Tip
Before weighting two income indications, ask what each one leaves out. If expense structures differ, the measure taken after expenses usually fits better.
Common Mistakes to Avoid
- -Averaging two indications when one has an identifiable flaw
- -Treating lower gross rent as lower value when net income is unaffected
- -Applying a gross multiplier across different utility arrangements
Concept Deep Dive
Analysis
This tests reconciliation within the income approach when two indications come from the same sales but measure income at different levels. The candidate must work out why the multiplier result is the lower one. The sales' gross rent includes money that goes straight back out for utilities, while the subject's does not, so a gross measure misses the difference and a net measure captures it. The right response is to weight the measure that reflects the difference.
Background Knowledge
Income multipliers work best when the sales and the subject have similar expense structures, because a multiplier skips over expenses. Overall rates and multipliers must both come from sales comparable to the subject, including similar income streams. When indications differ within an approach, the appraiser weighs how well each one fits the property and does not rely on a simple average.
Real-World Application
An appraiser values a rental building where tenants were recently sub-metered, while all nearby sales still include utilities in the rent. The multiplier result looks low, so the report explains the difference in expense structure and places the most weight on the overall rate result.
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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The subject property has annual EGI of $92,000. A comparable with annual EGI of $100,000 sold for a cash-equivalent price of $850,000. Sales in the market area indicate the subject would sell at the same price-to-income ratio, with no other adjustments. What is the subject's indicated value, to the nearest dollar?