California Real Estate Broker ExaminationValuation and AppraisalMedium
A property has a potential gross income of $120,000 per year. The appraiser estimates a 5% vacancy and collection loss and operating expenses of $30,000. If the market dictates a Gross Rent Multiplier (GRM) of 8, what is the estimated value of the property?
- A$720,000
- B$912,000
- C$760,000
- D$960,000
Show answer & explanationAnswer & explanation
Correct answer: B. $912,000
First, calculate Effective Gross Income (EGI): $120,000 * (1 - 0.05) = $114,000. The GRM applies to EGI, not Net Operating Income. Property Value = EGI * GRM = $114,000 * 8 = $912,000. Operating expenses are not used in GRM calculations.
Why the other options are wrong
- A. Incorrect, subtracts operating expenses before applying GRM, which is incorrect for GRM ($90,000 * 8 = $720,000).
- C. Incorrect, miscalculation or uses wrong figures.
- D. Incorrect, uses Potential Gross Income ($120,000 * 8 = $960,000) instead of Effective Gross Income.
Gross Rent Multiplier (GRM)
The Gross Rent Multiplier (GRM) is a quick valuation tool that relates a property's sale price to its annual or monthly gross rental income, used primarily for residential properties.
- Formula: Property Value = Gross Rent * GRM.
- Gross Rent can be Potential Gross Income (PGI) or Effective Gross Income (EGI), depending on local practice.
- Does not account for operating expenses or vacancy rates (unless EGI is used).
- Used as a rough estimate, less precise than the full income approach.
Memory trick: G-R-M: Gross Rent Multiplies to Value.