Within the income approach for a fourplex, direct capitalization uses NOI of $48,100 and a 6.5% overall rate, and a monthly gross rent multiplier of 140 applies to market rent of $5,150 per month. The appraiser gives direct capitalization 70% weight and the GRM indication 30% because the capitalization data are better supported. What is the reconciled income approach indication?
Correct Answer
C) $734,300
Direct capitalization gives $48,100 / 0.065 = $740,000 and the GRM gives $5,150 x 140 = $721,000, so the weighted indication is 0.70 x $740,000 + 0.30 x $721,000 = $734,300. $726,700 reverses the weights, $730,500 is the simple average, and $740,000 uses direct capitalization alone and skips reconciliation within the approach.
Why This Is the Correct Answer
Option C is correct because direct capitalization indicates $740,000 (48,100 / 0.065) and the GRM indicates $721,000 (5,150 x 140). Weighting them 70/30 gives 518,000 + 216,300 = $734,300, which leans toward the better-supported capitalization result.
Why the Other Options Are Wrong
Option A: $726,700
Option A, $726,700, reverses the weights: 0.30 x 740,000 + 0.70 x 721,000. That gives the GRM, the less supported method, the larger share.
Option B: $730,500
Option B, $730,500, is the simple average (740,000 + 721,000) / 2. It ignores the 70/30 weighting the appraiser based on data support.
Option D: $740,000
Option D, $740,000, uses direct capitalization alone. The appraiser gave the GRM indication 30% weight, which pulls the result down to $734,300.
Two income methods, one indication
Compute each income method's value, then weight them by how well each is supported before moving to the final reconciliation.
How to use: Use this when a stem gives both NOI with a cap rate and rent with a GRM.
Exam Tip
Check that a monthly GRM is applied to monthly rent, and convert the cap rate to a decimal before dividing.
Common Mistakes to Avoid
- -Reversing the weights between the two methods
- -Averaging the two income indications equally
- -Skipping reconciliation within the approach and using one method alone
Concept Deep Dive
Analysis
This tests reconciliation within the income approach. The candidate first develops two indications (direct capitalization and a GRM) and then weights them according to the support for each method. Three steps are involved, and errors in any one lead to a distractor.
Background Knowledge
Several indications can arise within one approach, such as direct capitalization and a gross rent multiplier in the income approach, and they are generally resolved within that approach before the final reconciliation. A weighted average lets the better-supported method carry more influence.
Real-World Application
An appraiser valuing a fourplex has strong expense and cap rate data from recent small-apartment sales but only a few GRM pairs. The income section weights direct capitalization 70% and explains why before carrying the result into the final reconciliation.
More Reconciliation Questions
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