An appraiser is developing a monthly gross rent multiplier for a rental house with market rent of $2,400. Three recent cash sales of similar single rental houses indicate multipliers of 200, 205 and 210. In the same period, an investor paid $2,520,000 cash in one transaction for a seller's six similar rental houses, each renting for $2,400 per month. Market conditions were stable throughout. How should the appraiser treat the six-house sale?
Correct Answer
C) Give its 175 multiplier little weight unless adjusted for the bulk sale
The sale works out to $2,520,000 ÷ 6 = $420,000 per house, or a multiplier of $420,000 ÷ $2,400 = 175, well below the single-house range of 200 to 210. A buyer of several properties at one price commonly pays less per property than individual buyers, so this figure does not measure the price of one house. Averaging it in or favoring it would pull the value below what single-house buyers pay. Stable market conditions rule out a falling market as the reason.
Why This Is the Correct Answer
Option C is correct because a purchase of six houses at one price can carry a quantity discount, so its multiplier of 175 reflects a bulk transaction rather than the market for one house. It deserves little weight unless the effect of the bulk sale can be measured and adjusted.
Why the Other Options Are Wrong
Option A: Average its 175 multiplier equally with the three single-house multipliers
Option A would average the 175 multiplier equally with 200, 205 and 210. Equal weight treats a bulk purchase as though it were as comparable as the single-house sales, which pulls the result below what buyers of one house pay.
Option B: Give its 175 multiplier the most weight because it covers the most houses
Option B would give the 175 multiplier the most weight because it covers six houses. The number of houses in one transaction does not make it better evidence; it is still one sale, and its size is the reason it differs from the subject.
Option D: Read its 175 multiplier as evidence that rental house prices are falling
Option D reads the 175 multiplier as a sign of falling prices. Market conditions were stable and single-house sales in the same period show 200 to 210, so the gap points to the bulk transaction, not to the market.
Wholesale Price, Retail Subject
A six-house deal is a wholesale price, and one house is a retail sale. Do not value a retail item on a wholesale multiplier without an adjustment.
How to use: Use the wholesale-retail comparison when a data set includes one price for several properties.
Exam Tip
When one data point sits apart from the others, look in the facts for a reason tied to the transaction. Convert a group price to a per-property figure before comparing it.
Common Mistakes to Avoid
- -Dividing the group price by one house's rent without first finding the per-house price
- -Weighting a sale by the number of properties it includes
- -Attributing a bulk sale's lower price to a change in market conditions
Concept Deep Dive
Analysis
A multiplier is reliable only when the sale behind it is comparable to the subject, including its terms and market of buyers. A six-house purchase at one price is a different kind of transaction from the sale of one house, and the lower per-house price can reflect the size of the purchase. The candidate should derive the 175 figure, compare it with the single-house range and identify why it differs.
Background Knowledge
Income multipliers must come from sales comparable to the subject. When several parcels sell together, the group price is often below the sum of individual prices because the buyer takes a quantity discount. A multiplier from such a sale may understate what a typical buyer would pay for one property.
Real-World Application
An investor buys a seller's scattered rental houses in one closing at a price per house below recent individual sales. An appraiser valuing one similar house reports the transaction but relies on the single-house sales for the multiplier.
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