Why must expense and vacancy characteristics be examined when applying a gross-rent multiplier from comparable sales?
Correct Answer
C) The multiplier does not deduct them, so differences hurt comparability.
A gross-income multiplier relates price to a specified gross-income base. It does not explicitly model each expense or loss. Comparable operating characteristics matter; an extracted multiplier is not a guarantee that atypical costs or vacancy are automatically corrected.
Why This Is the Correct Answer
Option C is correct because the multiplier works on gross income and does not explicitly deduct expenses or vacancy loss. Differences in those characteristics between the subject and comparables therefore reduce comparability. An extracted multiplier does not correct for atypical costs or vacancy on its own.
Why the Other Options Are Wrong
Option A: Small rental properties seldom incur vacancy or owner-paid expenses.
Option A, that small rental properties seldom incur vacancy or owner-paid expenses, is wrong because small rentals do experience vacancy and owner-paid costs, which is exactly why they must be compared.
Option B: Gross rent sets value by law, so costs need not be considered.
Option B, that gross rent sets value by law so costs need not be considered, is wrong because no law sets value from gross rent; the GRM is a market-derived relationship that assumes similar operating characteristics.
Option D: The multiplier already corrects for unusual subject expenses.
Option D, that the multiplier already corrects for unusual subject expenses, is wrong because a multiplier from comparables reflects the comparables' typical operations and does not adjust for costs that are atypical at the subject.
Gross hides the expenses
A GRM never sees expenses or vacancy, so they must already be similar across the comparables and the subject.
How to use: Use this to explain why GRM comparables must match on operating characteristics.
Exam Tip
Choose answers that recognize the GRM's limits; options claiming it automatically handles expenses or is set by law are not correct.
Common Mistakes to Avoid
- -Assuming a GRM adjusts for the subject's unusual expenses
- -Ignoring vacancy differences between comparables and subject
- -Applying a GRM from properties with a different expense structure
Concept Deep Dive
Analysis
This question tests why gross rent multipliers require comparables with similar operating characteristics. A GRM relates price to gross income and does not deduct expenses or vacancy. If the subject and comparables differ in those characteristics, the multiplier will not capture the difference.
Background Knowledge
A gross rent or gross income multiplier is derived by dividing sale prices by gross income and is applied to the subject's gross income of the same type. Income is processed only to the gross level, so expenses and vacancy are not analyzed separately. The method is reliable only when comparables and subject have similar expense and vacancy patterns.
Real-World Application
An appraiser applies a GRM to a duplex whose owner pays all utilities, while the comparables' tenants pay their own. Because the subject's expenses are higher, the GRM would overstate value. The appraiser selects more similar comparables or gives the GRM less weight.
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?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
The subject property is a four-unit apartment building whose owner manages it personally, pays no management fee and takes a $1,200 annual personal draw that does not appear on the operating statement. Effective gross income is $60,000 and the statement's expenses, including property taxes, total $24,000. Managers of competing buildings charge 5% of effective gross income. Sales of similar properties, analyzed with market management deducted, indicate an 8% overall rate. What is the indicated value by direct capitalization?
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