Two properties have identical gross income but different operating expenses. The same gross-income multiplier is applied to each. What numerical result follows?
Correct Answer
B) Both receive the same gross-multiplier indication.
The same multiplier times identical gross income produces the same numerical indication, regardless of expenses. Higher expenses produce lower NOI, so a gross multiplier applied without regard to expense differences can misstate the relative value of the two properties; that is why comparables used for a gross multiplier should have similar expense and vacancy characteristics.
Why This Is the Correct Answer
Option B is correct because the same multiplier applied to identical gross income produces the same numerical indication. The calculation uses gross income only, so expense differences do not change the result. This is why comparables used for a gross multiplier should have similar expense and vacancy characteristics.
Why the Other Options Are Wrong
Option A: The higher-expense property receives a higher multiplier indication.
Option A says the higher-expense property receives a higher multiplier indication. Expenses are not part of a gross-multiplier calculation, so both properties get the same figure; if anything, higher expenses mean lower NOI and potentially lower value.
Option C: The lower-expense property receives a lower multiplier indication.
Option C says the lower-expense property receives a lower multiplier indication. The gross multiplier ignores expenses, so the lower-expense property receives the same figure as the other property.
Option D: The calculation adjusts for each expense difference.
Option D says the calculation adjusts for each expense difference. A gross multiplier is applied to gross income and contains no step that adjusts for expenses, which is the method's main limitation.
Gross in, gross out
A gross multiplier sees only gross income; expenses are invisible to it.
How to use: Use this when a question asks how expense differences affect a gross-multiplier result.
Exam Tip
Separate the arithmetic question (what number results) from the judgment question (whether the result is reliable).
Common Mistakes to Avoid
- -Assuming a gross multiplier reflects expense differences
- -Using gross-multiplier comparables with very different expense ratios
- -Applying a gross multiplier to net income
Concept Deep Dive
Analysis
This question tests the mechanical result of applying a gross income multiplier. Because a gross multiplier is applied to gross income, expenses do not enter the arithmetic. Identical gross income times the same multiplier gives the same number, which also reveals the method's weakness when expenses differ.
Background Knowledge
A gross income multiplier relates sale price to gross income and is applied to the subject's gross income at the same level from which it was derived. It does not account for differences in operating expenses, so it works best when comparables and subject have similar expense ratios.
Real-World Application
Two duplexes rent for the same amount, but one has much higher utility and maintenance costs paid by the owner. A gross rent multiplier gives both the same indication, so the appraiser looks for comparables with similar expense patterns or gives more weight to an NOI-based method.
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