A rented comparable sold for a cash-equivalent price of $418,000 with monthly gross rent of $1,900. The subject has monthly gross rent of $2,050. Market data indicate the subject would sell at the same price-to-rent ratio, with no other adjustments. What is the indicated value of the subject, to the nearest dollar?
Correct Answer
D) $451,000
418000÷1900×2050 = 451000. Common errors: inverting the income ratio (comparable income ÷ subject income) gives $387,415; using the comparable price without adjusting for the income difference gives $418,000; adding the income difference dollar-for-dollar to the comparable price gives $418,150.
Why This Is the Correct Answer
Option D is correct because $418,000 ÷ $1,900 = 220, and 220 × $2,050 = $451,000. The multiplier is derived from and applied to monthly gross rent, so the income bases match.
Why the Other Options Are Wrong
Option A: $387,415
Option A, $387,415, comes from $418,000 × $1,900 ÷ $2,050, which inverts the rent ratio. The correct calculation is $418,000 ÷ $1,900 × $2,050 = $451,000.
Option B: $418,000
Option B, $418,000, uses the comparable price without adjusting for the subject's higher rent. The correct value is $418,000 ÷ $1,900 × $2,050 = $451,000.
Option C: $418,150
Option C, $418,150, comes from $418,000 + ($2,050 − $1,900), adding the $150 rent difference dollar-for-dollar to the price. The multiplier method gives $418,000 ÷ $1,900 × $2,050 = $451,000.
Divide the comp, multiply the subject
Comparable price ÷ comparable monthly rent gives the GRM; GRM × subject monthly rent gives value.
How to use: Use this order whenever a GRM must be built from a comparable.
Exam Tip
Check direction: higher subject rent should give a value above the comparable price.
Common Mistakes to Avoid
- -Inverting the rent ratio
- -Adding the rent difference directly to the price
- -Mixing monthly and annual rent
Concept Deep Dive
Analysis
This question tests extracting a gross rent multiplier from a comparable and applying it to the subject's monthly rent. Divide the comparable price by its monthly rent, then multiply by the subject's monthly rent. The subject rents for more, so its value should exceed the comparable price.
Background Knowledge
Residential appraisers commonly multiply estimated monthly market rent by a gross rent multiplier derived from comparable rented sales. The multiplier must be extracted and applied on the same monthly gross rent basis. Value then rises or falls in proportion to rent.
Real-World Application
An appraiser valuing a rented single-family home finds a similar rented sale at $418,000 with $1,900 monthly rent. She derives a GRM of 220 and applies it to the subject's $2,050 market rent for an income approach indication.
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Next Question
Market data show a price-to-income multiplier of 9.75, derived from the annual EGI of similar properties. The subject's annual EGI is $92,000. What value does the multiplier indicate?