A comparable sold for a cash-equivalent price of $1,200,000 with annual potential gross income of $150,000. The subject property has annual potential gross income of $140,000, measured on the same basis. Market data indicate the subject would sell at the same price-to-income ratio, with no other adjustments. What is the indicated value of the subject, rounded to the nearest dollar?
Correct Answer
A) $1,120,000
1200000 ÷ 150000 × 140000 = 1120000. Common errors: using the comparable price without adjusting for income gives $1,200,000; inverting the income ratio gives $1,285,714; adding the income difference as dollars instead of applying the ratio gives $1,190,000.
Why This Is the Correct Answer
Option A is correct because the comparable's multiplier is $1,200,000 ÷ $150,000 = 8.0. Applying it to the subject gives 8.0 × $140,000 = $1,120,000. The multiplier is applied to the same level of income from which it was derived.
Why the Other Options Are Wrong
Option B: $1,190,000
Option B, $1,190,000, comes from adding the income difference as dollars to the price: $1,200,000 + ($140,000 − $150,000) = $1,190,000. Applying the ratio gives $1,200,000 ÷ $150,000 × $140,000 = $1,120,000.
Option C: $1,200,000
Option C, $1,200,000, uses the comparable's sale price without adjusting for the subject's lower income. Applying the ratio gives $1,200,000 ÷ $150,000 × $140,000 = $1,120,000.
Option D: $1,285,714
Option D, $1,285,714, comes from inverting the income ratio: $1,200,000 ÷ $140,000 × $150,000 = $1,285,714. The subject's income belongs in the numerator: $1,200,000 ÷ $150,000 × $140,000 = $1,120,000.
Price per income dollar
Find how many dollars of price each dollar of gross income bought at the comparable, then multiply by the subject's gross income.
How to use: Use this to set up gross multiplier problems in the right direction.
Exam Tip
A subject with less income than the comparable should show a lower value, so an answer above the comparable's price points to an inverted ratio.
Common Mistakes to Avoid
- -Inverting the income ratio
- -Adjusting the comparable's price by the dollar difference in income
- -Applying a PGI multiplier to effective gross income
Concept Deep Dive
Analysis
This question tests extracting a gross income multiplier from a comparable and applying it to the subject's potential gross income. The multiplier is the comparable's price divided by its PGI, and it is applied to the subject's PGI on the same basis. The wrong answers ignore, invert or misapply the ratio.
Background Knowledge
A potential gross income multiplier equals sale price divided by potential gross income. It is applied to the subject's potential gross income measured the same way. Reliable results require comparables with similar expense and vacancy characteristics.
Real-World Application
An appraiser values a fourplex using a recent cash-equivalent sale of a similar property. The comparable's price divided by its potential gross income gives a multiplier of 8.0. Applying it to the subject's potential gross income indicates value for reconciliation with other methods.
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?
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