The subject property is a 20-unit apartment building being appraised in fee simple. Sales of similar properties indicate a gross income multiplier of 8.5. The current rent roll, at below-market rents, shows potential gross income of $200,000. The appraiser's rent survey indicates market potential gross income of $240,000. A prospective buyer's pro forma shows potential gross income of $260,000. What is the indicated market value?
Correct Answer
C) $2,040,000
When valuing a property, the multiplier is applied to market potential gross income, the level a typical purchaser would project: 8.5 × $240,000 = $2,040,000. The owner's current rent roll gives $1,700,000, an average of all three income figures gives $1,983,333, and one buyer's pro forma gives $2,210,000.
Why This Is the Correct Answer
Option C is correct because a fee simple market value uses market potential gross income, here the appraiser's supported $240,000. Multiplying by 8.5 gives $2,040,000.
Why the Other Options Are Wrong
Option A: $1,700,000
Option A, $1,700,000, applies the multiplier to the owner's current rent roll: 8.5 × $200,000. The assignment is fee simple at market, so the correct figure is 8.5 × $240,000 = $2,040,000.
Option B: $1,983,333
Option B, $1,983,333, averages all three income figures: 8.5 × ($700,000 ÷ 3). Averaging mixes below-market rents and one buyer's projection into a market estimate, so the correct figure is 8.5 × $240,000 = $2,040,000.
Option D: $2,210,000
Option D, $2,210,000, applies the multiplier to one buyer's pro forma: 8.5 × $260,000. An individual buyer's projection is not market evidence by itself, so the correct figure is 8.5 × $240,000 = $2,040,000.
Derive anticipated, apply market
On the comparable, use what its buyer expected. On the subject, use what the market supports.
How to use: Use this phrase when a question offers several income figures for the subject.
Exam Tip
When several income figures are offered, first identify the interest and value definition. A fee simple market value points to market income.
Common Mistakes to Avoid
- -Applying a multiplier to current below-market rents in a fee simple assignment
- -Accepting a buyer's or broker's pro forma without market support
- -Averaging income figures that measure different things
Concept Deep Dive
Analysis
The multiplication is simple, so the real test is selecting the income figure. A market value of the fee simple interest rests on what a typical purchaser would project, not on this owner's rents or on one optimistic buyer's numbers. The market-supported estimate is the figure that fits.
Background Knowledge
Multipliers are derived from the income buyers anticipated in actual sales, but they are applied to the market level of income for the property being appraised. Market estimates reflect what a typical purchaser would project, supported by rents at comparable properties.
Real-World Application
An owner hands the appraiser a below-market rent roll while a broker circulates an aggressive pro forma. The appraiser surveys competing rents, forms a market potential income estimate, and applies the multiplier to that figure.
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?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
An appraiser is valuing a fourplex with effective gross income of $110,000 and has found three cash-equivalent sales. Sale A sold for $720,000 with EGI of $90,000. Sale B sold for $820,000 with EGI of $100,000. Sale C sold for $850,000 with net operating income of $85,000; its EGI could not be verified. The appraiser averages the effective gross income multipliers available from the sales. What is the indicated value?
Next Question
The subject property is a 50-unit apartment building with 40,000 rentable and 44,000 gross square feet. Potential rent is $400,000 with 8% vacancy and collection loss. Expenses are property taxes of $30,000 a year, insurance of $0.50 per rentable square foot a year, maintenance of $600 per unit a year, a trash contract of $900 per month and management at 5% of effective gross income. The overall rate is 8%. What is the indicated value by direct capitalization?