A California real estate agent explains to an investor that the Gross Rent Multiplier (GRM) is a simplified method of property valuation. Compared to the capitalization rate method, what is the main limitation of the GRM approach in the California market?
Correct Answer
B) The GRM does not account for operating expenses, vacancy rates, or differences in expense ratios between comparable properties and the subject
The GRM uses gross rent without deducting operating expenses, vacancy, or other costs. This is its main limitation — two properties with the same gross rent may have very different NOI due to different expense ratios, property tax burdens (which vary significantly in California due to Prop 13), insurance costs, and maintenance requirements. The cap rate method, which uses NOI, accounts for these differences.
Why This Is the Correct Answer
Why the Other Options Are Wrong
Deep Analysis of This Property Valuation Financial Analysis Question
Background Knowledge for Property Valuation Financial Analysis
Real World Application in Property Valuation Financial Analysis
Common Mistakes to Avoid on Property Valuation Financial Analysis Questions
Related Topics & Key Terms
Key Terms:
More Property Valuation Financial Analysis Questions
Example of economic obsolescence in real estate?
Which appraisal report type do California lenders commonly rely on for single-family residence financing?
Return of an investor’s investment is provided for through:
All of the following are one of the four important elements of value, except:
Which of the following is the least important factor used to determine the market value of a property?
- → A 4-unit apartment building in Sacramento has monthly rents of $1,500 per unit. The submarket vacancy rate is 5%. Annual operating expenses are $28,800. The prevailing cap rate for comparable properties is 6%. Using the income approach, what is the estimated value of the property?
- → Under California law, when a real estate licensee prepares a Comparative Market Analysis (CMA) for a property, what is the legal distinction between a CMA and a formal appraisal?
- → Owner converted master bedroom into 'granny flat' costing $50,000 but adding $30,000 value. Later, kitchen remodel cost $15,000 but added $20,000 value. Which statement is correct?
- → The appraisal approach that estimates value by comparing a property to similar recently sold properties is the:
- → The period of time a structure continues to earn sufficient income to continue operations is referred to as the structure’s:
- → An appraiser in California is using the cost approach for a property in Sacramento and must account for entrepreneurial profit (also called developer's profit). A local developer confirms that typical profit margins in the Sacramento market are 15-20% of total development costs. How should the appraiser handle entrepreneurial profit?
- → A California buyer's agent is reviewing comparable sales data and notices that the county recorder's office lists different documentary transfer tax amounts for similar properties in the same city. Some properties show both a county and city transfer tax, while others show only the county tax. What does this difference indicate about the sale verification process?
- → When conducting a sales comparison analysis in California, an appraiser discovers that the subject property has an Accessory Dwelling Unit (ADU) that was built under California's recent ADU legislation. How should the appraiser handle this feature?
- → A California real estate agent is selecting comparable sales for a CMA on a property in Fresno. The agent finds a sale from 14 months ago in the same neighborhood. Under standard California CMA practice, why might the agent hesitate to use this comparable?
- → A California real estate licensee is preparing a CMA and notices that one comparable property sold in a foreclosure auction conducted by a trustee under a deed of trust. How should this sale be handled in the CMA?
People Also Study
Buyer Representation Agreement
8% of exam
Property Ownership
10% of exam
Land Use Controls and Regulations
8% of exam
Valuation and Market Analysis
10% of exam
Previous Question
A 10-unit apartment building in Oakland sold for $2,800,000. The property generates $20,000 per month in gross rents with a 4% vacancy rate. Annual operating expenses are $96,000. What is the cap rate implied by this sale?
Next Question
A California appraiser extracts a GRM from a comparable sale. A triplex in Anaheim sold for $975,000. The property was renting for a total of $4,875 per month at the time of sale. What is the Gross Rent Multiplier based on monthly rent?