The subject property is a fourplex with projected annual NOI of $55,000. A similar fourplex recently sold for $720,000. The seller's reported NOI of $60,000 included a one-time insurance recovery of $12,000 that the buyer did not expect to recur. What is the indicated value of the subject by direct capitalization?
Correct Answer
D) $825,000
Extraction should rest on income the buyer anticipated, which is $60,000 − $12,000 = $48,000. That gives $720,000 ÷ $48,000 = 15.0 times NOI, and 15.0 × $55,000 = $825,000. Using reported NOI gives a 12.0 multiple and $660,000. Carrying over the comparable's price gives $720,000, and averaging the two multiples (13.5) gives $742,500.
Why This Is the Correct Answer
Option D is correct because the buyer anticipated $60,000 − $12,000 = $48,000 of NOI, making the multiple $720,000 ÷ $48,000 = 15.0, equivalent to about a 6.67% overall rate. Applying it to the subject gives 15.0 × $55,000 = $825,000.
Why the Other Options Are Wrong
Option A: $660,000
Option A, $660,000, keeps the one-time recovery in the comparable's income: $720,000 ÷ $60,000 = 12.0, then 12.0 × $55,000. That understates what the buyer paid for anticipated income. The correct calculation is 15.0 × $55,000 = $825,000.
Option B: $720,000
Option B, $720,000, carries over the comparable's price. The relationship has not been applied to the subject's own income. The correct calculation is 15.0 × $55,000 = $825,000.
Option C: $742,500
Option C, $742,500, averages two multiples: (12.0 + 15.0) ÷ 2 = 13.5, then 13.5 × $55,000. The 12.0 rests on income the buyer did not expect, so it should not be blended in. The correct calculation is 15.0 × $55,000 = $825,000.
Clean both sides of the ratio
The comparable's income needs the same scrutiny as the subject's. One-time receipts come out before you divide.
How to use: Use this when a comparable's income includes a fee, settlement or other unusual item.
Exam Tip
Read comparable data as closely as subject data. A fact about a one-time item is usually there because it changes the extracted rate.
Common Mistakes to Avoid
- -Extracting a rate from reported income with a one-time receipt in it
- -Blending a distorted multiple with a clean one
- -Assuming a comparable's reported NOI needs no verification
Concept Deep Dive
Analysis
The trap is in the comparable's income rather than the subject's. A buyer does not pay for a one-time receipt as if it would repeat, so it comes out before the relationship is extracted. Clean the comparable's income first and then apply the result.
Background Knowledge
Rates and multipliers extracted from sales relate price to the income the buyer anticipated, which may differ from actual current income. Unusual receipts or costs in a sale year can distort the extracted figure. Verifying sale data often means adjusting reported income before calculating anything.
Real-World Application
While verifying a sale with the buyer, an appraiser learns the seller's NOI included a one-time insurance recovery. The appraiser removes it, extracts the rate on anticipated income, and notes the adjustment in the sale write-up.
More Income Approach Questions
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The subject's annual PGI is $128,000. Sales in the market area indicate a price-to-income multiplier of 9.5, based on annual PGI. What is the indicated value?
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