Two properties have identical gross income but different expense ratios. Applying the same GRM to both will:
Correct Answer
B) Overvalue the one with higher operating expenses
Why this is correct: A Gross Rent Multiplier (GRM) is calculated as Sale Price / Gross Income. It does not account for operating expenses. Applying the same GRM to two properties with identical gross income but different expenses will assign them the same value, overvaluing the property with higher expenses (lower net income). Why the other choices are wrong: It will not value both correctly because net income differs. It does not undervalue the property with lower expenses; it fails to give it a premium. It has a significant effect, producing an incorrect indication. Exam tip: GRM ignores expenses. Use an overall rate (OAR) when expense data is available and reliable.
Why This Is the Correct Answer
Why this is correct: A Gross Rent Multiplier (GRM) is calculated as Sale Price / Gross Income. It does not account for operating expenses. Applying the same GRM to two properties with identical gross income but different expenses will assign them the same value, overvaluing the property with higher expenses (lower net income). Why the other choices are wrong: It will not value both correctly because net income differs. It does not undervalue the property with lower expenses; it fails to give it a premium. It has a significant effect, producing an incorrect indication. Exam tip: GRM ignores expenses. Use an overall rate (OAR) when expense data is available and reliable.
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