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Appraisal Procedures 2022 > Part 4 Rates and factors > Flashcards

Part 4 Rates and factors Flashcards

1
Q

The mathematical process associated with rates is

A

division.

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2
Q

Multipliers are identified with

A

the type of income that they are being multiplied by (used in the forumula)

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3
Q

How does an appraiser find out which multiplier to use?

A

By talking to investors and brokers, and listening to how they make decisions to buy or sell.

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4
Q

Whether you use a potential gross income multiplier (PGIM), an effective gross income multiplier (EGIM), or a net income multiplier (NIM) depends on

A

which type of income for the comparable sale that you used to solve for the relationship.

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5
Q

Remember, when you are working with multipliers, you are not using the IRV (income/Rate=Value) formula, but instead working with the

A

VIF formula

Value=Income x Factor

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6
Q

The VIF formula is designed to reflect

Value = Income x Factor

A

the multiplicative relationship of income and value.

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7
Q

Any factor can be converted to a rate by

A

simply taking its reciprocal (R=1/F), but this derived capitalization rate (R) is not an overall rate (RO) unless it is based on NOI.

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8
Q

If you multiply any number by a factor, you will get the same result if you divide by the factor’s reciprocal

A

Reciprocal

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9
Q

If an overall cap rate (RO) is 6.25% what is its corresponding factor?

A

The answer can be found by taking the reciprocal of 6.25%

1 divided by 0.0625 = 16

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10
Q

What type of income is used in the IRV formula?

income/rate= value

A

NOI

net operating income

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11
Q

What types of income are used in the VIF formula?

Value= Income x factor

A

PGI (potential gross income)

EGI (effective gross income)

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12
Q

In residential applications, ______ is used in the VIF formula to capitalize income

A

monthly rent

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13
Q

The rate used in capitalization is also a specific type of rate. If you are seeking the value of property (that is, both land and improvements) based on NOI, then the rate used is referred to as

A

an overall rate (RO)

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14
Q

A factor is used instead of a capitalization rate when an appraiser is employing the_____ formula to capitalize income.

A

VIF

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15
Q

In residential applications, the factor is referred to as a ______ and is applied to the monthly rent for the property

A

gross rent multiplier

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16
Q

A _____ is an element of mathematical set that when multiplied by a given element yields the identity element.

A

Reciprocal

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17
Q

A reciprocal is also referred to as a

A

multiplicative inverse

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18
Q

A 16-unit apartment building has a potential gross income of $124,800.
The vacancy rate is 5% and the operating expenses and replacement
allowance is $40,000. If the overall capitalization rate is 8.25%, what is
the value by direct capitalization?

A

$124,800 PGI − vacancy loss of $6,240 = $118,560 EGI
$118,560 EGI − $40,000 expenses = $78,560 NOI
$78,560/0.0825 = $78,560

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19
Q

Let’s try something a little trickier. Suppose you don’t have the cap rate, but you have a similar 16-unit apartment complex that sold for $924,000. What would the cap rate be if the net operating income was the same?

A

In this case, you have Income and Value, and you are solving for Rate. I / V = R \r $78,560 NOI / $924,000 Value = 8.5% Rate

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20
Q

Income/Rate=R

A

.

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21
Q

IRV and VIF fit into the T bar the way they sound

A

I
________
R V

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22
Q

A rate is a divisor. A factor is a

A

multiplier

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23
Q

GIMs are _____ multipliers used in commercial properties, and GRMs are monthly multipliers used in residential properties of one to four units.

A

GIMs

Gross income multiplier

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24
Q

GIM is used in _____properties with five or more units and in some commercial properties (for example, hotels) as a method of direct capitalization

A

residential

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25
Q

This is the ration between the sale price (or value) of a property and its effective gross income(EGI) or its potential gross income (PGI)

A

Gross income multiplier

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26
Q

What does IRV represent

A

The three major components of capitalization.

Income, Rate, Value

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27
Q

The rate used in the capitalization of net operating income is

A

an overall rate of return

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28
Q

The VIF formula is designed to reflect _______

A

the multiplicative relationship of income and value.

29
Q

The procedure for calculating a GIM is through

A

the analysis of the sales of comparable properties (F = V/I)
Dividing the sales price of the comparable sale by is gross annual income will reflect how many times the annual income, the property sold for or the multiple of income to value.

30
Q

For example, if a warehouse sold for $1,000,000 and it is leased for a gross anual rental of $200,000, it sold for 5 times its gross income. The relationship of the sales price to the cross income is

A

a 5 multiple or a 5 GIM

31
Q

GIMs are calculated from_______

A

several comparable sales and then reconciled into one multiplier.
This one multiplier can then be used to convert the gross annual income of the subject property into a value indication of the subject property through multiplication.

32
Q

The ratio of total operating expenses to effective gross income.

A

Operating expense ratio.

33
Q

In contrast to a GIM, a gross rent multiplier (GRM) is used principally in residential properties with one to four units. GRM applies to

A

rental income only.

34
Q

What is the “income approach” for one to four family appraisals.

A

GRM

gross rental multiplier

35
Q

The procedure for calculating a GRM is through

A

the analysis of sales of comparable properties

36
Q

For example, a comparable single-family residence just sold for $200,000. It was rent for $2,000 per month, which means that is sold for 100 times its monthly rental income. This relationship is called

A

a GRM, which in this case would be 100.

This multiple, calculated from several comparable sales, is then reconciled into one multiplier.

37
Q

What are the limitations to GIMs and GRMs?

A

they are only applicable where reliable sales and rental data exist in sufficient quantitates.

38
Q

It is important to derive an accurate cap rate. Since it will become part of the IRV formula, an inappropriately high cap rate will result in an excessively low value, and an inappropriately ____ cap rate will result in an excessively high value.

A

low

39
Q

The most commonly used, and most supportable method of deriving an overall capitalization rate is to

A

extract it from comparable sales.

40
Q

Extraction of rates from comparable sales is the preferred method when

A

sufficient data on sales of similar, competitive properties are available.

41
Q

The extraction technique is nothing more than using the ____forumula.

A

IRV

42
Q

Extracting an overall rate

One of the comparable warehouses sold for $1,000,000 (VO) and was leased at a net annual rent (after operating expenses) of $100,000. Using the variation of the IRV formula (or the T-bar), you can calculate the relationship (RO) of net operating income to value for the comparable sale in order to value the subject property. Hint: If you are using the T-Bar, the net operating income (IO) of $100,000 is the part, and the sale price (VO) of $1,000,000 is the whole. Using IRV, an overall rate (RO) can be extracted from the comparable sale as follows:

A

I / V = R

$100,000 (IO) / $1,000,000 (VO) = 0.10, or 10% (RO)

Okay, you have the rate. Now what? You can now use the extracted overall rate (RO) of 10% to capitalize the net operating income (IO) of the subject property using the IRV formula as follows:

I / R = V

$80,000 (IO) / 0.10 (RO) = $800,000 (VO) Subject Property

43
Q

______income is used in the IRV formula

A

NOI

net operating income

44
Q

_____ or ______ income are used in the VIF formula

A

PGI or

EGI

45
Q

In residential applications, _____ is used in the VIF formula to capitalize income.

A

Monthly rent

46
Q

A ____ is used instead of a capitalization rate when an appraiser is employing the VIF formula to capitalize income.

A

Factor

47
Q

What is NIM?

A

Net income multiplier

NIM is connected with NOI when used in the VIF formula

48
Q

A rate is typically less than 1 (for example, 0.085) whereas a factor is

A

generally greater than 1 (for example, 8.50 or 115).

49
Q

Procedure for using gross income multipliers

A

a. Begin by examining sales of properties with similar highest and best use
that were rented at the time of sale.
b. The selected properties must be comparable to the subject property as
well as to each other in their relevant location, physical, and economic
characteristics.
c. The selected sales must have operating expense ratios (OERs) similar to
the subject’s operating expense ratio
d. When a gross income multiplier is used, the gross income may include
sources other than rental space (for example, income from laundry,
vending, parking, etc.).
e. The income data used to derive the multipliers must be used consistently.
For example, if PGI is used for income, then all sales (and the subject
property) must use PGI as the income base.

50
Q

True or False
When a gross income multiplier is used, the gross income may include sources other than rental spcace (for example, income from laundry, vending, parking, etc)

A

TRUE

51
Q

Calculating the GIM

A

a. Derive the GIM for comparable properties by dividing the sale price by its
annualized gross income.
b. Once a sufficient number of sales are analyzed, the GIMs from the sales
are reconciled to a GIM appropriate for the subject property. The selected
GIM can then be used in the VIF formula to capitalize income into a value
indication for the subject property.

52
Q

Analyze market rent in light of the following:

A

ƒ Avoid furnished rentals, or adjust them if used.
ƒ Analyze existing rentals and lease terms of the subject property, if
applicable. However, understand this is contract rent, and it may or
may not be the same as market rent.
ƒ Consider the rents of sold properties and the rents of properties
that are not for sale. This is often done through a rent survey.
Again, the goal is to estimate market rent.
ƒ Examine the terms of the contracts and the conditions of rental.
Adjust the rents of the comparable properties for differences in
these items.
ƒ Make adjustment to the comparable rents for dissimilarities in
relevant location and physical characteristics.
ƒ Compare the subject rental and comparable rentals on the basis of
a common unit of comparison. In one-to-four unit residences, the
common unit is monthly rent per unit or per whole property.

53
Q

A three-unit residential property sells for $232,000, two units rent for $725 per
month, and one unit rents for $550 per month. What is the GRM for this property?

A

$232,000 / $2,000 = 116 GRM (use the VIF formula)

54
Q

After analyzing market data of comparable rentals, a GRM of 98 is derived. If the
monthly rent for the subject property is $4,000, what is the indicated value?

A

$4,000 × 98 = $392,000

55
Q

If the capitalization rate (R) is 9.5%, what is the equivalent factor (that is,
multiplier)?

A

1 / 0.095 = 10.526315, or 10.53 (take the reciprocal of the rate)

56
Q

IO is $112,500 and RO is 7.5%. What is the indicated value of the property?

A

$112,500 / 0.075 = $1,500,000 value

57
Q

If a property has annual gross income of $80,000 and the gross income multiplier
is 11.5, what is the indicated value of the property?

A

$80,000 × 11.5 = $920,000 value

58
Q

An appraiser is analyzing a sale that sold for $1,400,000. If the indicated NOI for
the property is $126,000, what is the overall capitalization rate?

A

$126,000 / $1,400,000 = 0.09 (or 9%) RO

59
Q

An appraiser is analyzing a sale that sold for $1,500,000. If the EGI for the
property is $200,000, what is the EGIM?

A

$1,500,000 / $200,000 = 7.5 EGIM

60
Q

Which of the following would you need to solve for a multiplier (F)?

A

EGI and Value

61
Q

Which of the following would you need to solve for value (V)?

A

net income and overall rate

62
Q

Which of the following do you need to know in order to solve for an operating expense ratio?

A

operating expenses and EGI

63
Q

A property sold for $500,000. The buyer anticipated that the potential gross income would be $100,000, the vacancy would be 10%, and expenses would be 45% of EGI in the year after the purchase. What is the overall capitalization rate (RO)? Round your answer to the nearest 0.5%.

A

$100,000 x 0.90 x 0.55 = $49,500 NOI / $500,000 = 0.099 or 10.0%

64
Q

A comparable four-unit residence just sold for $300,000. It was rented at the time of sale for (or had a market rent of) $1,000 per unit per month. What is the GRM?

A

Solve for gross monthly income NOI ($1,000 x 4 ) = $4,000 PGI.

$300,000 / $4,000 = 75.

65
Q

A gross income multiplier (GIM) is generally used to value what type of property?

A

commercial

66
Q

A 200 unit apartment just sold for $9,000,000. Rents averaged $900 per month, and the market vacancy was 10%. The property had an operating expense ratio of 35%, and typical overall capitalization rates are 10%. What effective gross income multiplier (EGIM) is indicated by this sale?

A

200 units x $900 x 12 = $2,160,000 PGI x (1-.1) = $1,944,000 EGI / $9,000,000.

Use the F = V / I formula $9,000,000 / $1,944,000 = 4.63 EGIM.

67
Q

What difference may be identified in the factors when a gross income multiplier (GIM) is used in analyzing commercial income properties, and a gross rent multiplier (GRM) is used in analyzing a residential income-producing property?

A

GIM is based on annual income, whereas the GRM is based on monthly rent in the case of a residential property.
GRM is sometimes used interchangeably with GIM, but the question identifies the GRM is being applied to a residential property.

68
Q

What is the value of a property that has an appropriate capitalization rate (R) of 12.5%, an operating expense ratio of 40%, and net operating income of $10,000?

A

Use the I / R = V formula $10,000 / 0.125 = $80,000.

69
Q

What is the value of a property that has a potential gross income of $100,000, vacancy and collection loss of 5%, an operating expense ratio of 45%, and an appropriate capitalization rate of 11.0%?

A

Solve for net income PGI - V&C loss = EGI - Expenses = Net Income, then apply the I / R = V formula.

$100,000 x (1 - 0.05) = $95,000 x (1 - 0.45) = $52,250 / 0.11 = $475,000

Appraisal Procedures 2022 (17 decks)

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