In March 2026, investor Malik Ford values an office building using direct capitalization. Effective gross income is $120,000, annual operating expenses are $40,000, and the market cap rate is 8%. If operating expenses increase by $8,000 and everything else stays the same, what is the new indicated value?
Correct Answer
D) $900,000
Step 1: New NOI = $120,000 − ($40,000 + $8,000) = $72,000. Step 2: New Value = $72,000 ÷ 0.08 = $900,000. Higher operating expenses reduce NOI, and with the cap rate unchanged, that lower NOI produces a lower value.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A transfer tax is a tax imposed on the transfer of ownership of real estate.
Reconciliation is the final step in the appraisal process where the appraiser analyzes the value indications from all applicable approaches and arrives at a single final opinion of value. It is not a simple average of the three values.
The comparable sales approach estimates a property's value by comparing it to similar properties that have recently sold in the same market area. It is the most widely used and reliable approach for appraising residential properties.
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