The subject property is a fourplex with annual gross income of $72,000 and owner-paid utilities that bring operating expenses to 50% of gross income. A comparable fourplex with tenant-paid utilities sold for $600,000, with annual gross income of $75,000 and operating expenses of 40% of gross income. The properties are otherwise similar. By how much does the value indicated by the comparable's gross income multiplier exceed the value indicated by its overall rate?
Correct Answer
C) $96,000
The multiplier is 8.0, indicating $72,000 × 8.0 = $576,000. The comparable's NOI of $45,000 gives a 7.5% rate, and the subject's NOI of $36,000 ÷ 0.075 = $480,000, so the gap is $96,000. The gross multiplier misses the subject's heavier expenses. Taking ten points of the $480,000 gives $48,000, and applying 8.0 to the NOI shortfall gives $57,600. Subtracting the $480,000 from the comparable's price gives $120,000.
Why This Is the Correct Answer
Option C is correct because the multiplier gives $72,000 × 8.0 = $576,000 and the overall rate gives $36,000 ÷ 0.075 = $480,000. The difference between them is $96,000.
Why the Other Options Are Wrong
Option A: $48,000
Option A, $48,000, treats the ten-point expense difference as a percentage of value: $480,000 × 0.10 = $48,000. The two subject indications differ by $576,000 − $480,000 = $96,000.
Option B: $57,600
Option B, $57,600, applies the multiplier to the NOI shortfall: ($43,200 − $36,000) × 8.0 = $57,600. A net income gap is capitalized at the 7.5% rate, and $7,200 ÷ 0.075 = $96,000.
Option D: $120,000
Option D, $120,000, subtracts the overall-rate value from the comparable's price: $600,000 − $480,000 = $120,000. The comparison requested is between the subject's indications, which is $576,000 − $480,000 = $96,000.
Same gross, different net
A gross multiplier sees income before expenses. If the subject keeps less of each dollar, the multiplier overstates its value.
How to use: Use this check before relying on a multiplier from a sale with a different expense ratio.
Exam Tip
When an expense ratio differs between comparable and subject, expect the gross multiplier and overall-rate results to disagree.
Common Mistakes to Avoid
- -Assuming a multiplier adjusts for expense differences
- -Comparing a subject indication with the comparable's price
- -Capitalizing an NOI gap with a gross multiplier
Concept Deep Dive
Analysis
This item shows in dollars why a gross multiplier needs comparable expense patterns. Both methods come from one sale, yet they diverge because the subject keeps less of each gross dollar. The multiplier stops at gross income, while the overall rate works from net income.
Background Knowledge
A gross income multiplier is applied before expenses, so differences in the net-to-gross relationship do not show up in the result. Such differences can distort the value estimate, which is why comparables should have similar expense ratios.
Real-World Application
A fourplex with owner-paid utilities is compared with a sale in which tenants pay them. An appraiser finds the gross multiplier result well above the net-income result and gives more weight to the method that reflects the subject's expenses.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
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