California Real Estate Salesperson Exam Practice - Question 70

Question

The gross multiplier method of appraisal would be of little value when appraising: 

Selections

A. Commercial property

B. Residential property

C. Apartment buildings

D. Public buildings 

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Answer: D

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5 Keys Summary

• The Gross Multiplier Method (also known as the Gross Rent Multiplier, or GRM) is an appraisal technique used primarily for income-producing property by converting expected gross income into an estimated value.

• This method requires knowing the property's gross rental income, and it applies only to properties that produce rent or income.

• Public buildings, such as city halls, churches, or schools (service buildings), are typically specialized, non-income-producing properties.

• Since public buildings do not generate rental income, the gross multiplier method is irrelevant and thus of little value for their appraisal.

• For appraising service-oriented properties like public buildings, the Cost Approach (Reproduction Cost Approach) is the most appropriate method because finding comparable sales or relying on income is difficult.

Explanations

The gross multiplier method, also known as the gross rent multiplier (GRM) method, is an appraisal technique specifically designed to estimate the value of income-producing properties based on their rental income .

Public buildings, such as city halls, churches, or schools, are service-oriented and generally do not generate rental income. Since the gross multiplier method relies entirely on a property's gross rental income for its calculation, it would be of little to no value for appraising properties that do not produce rental income. For such properties, other appraisal methods like the Cost Approach are more appropriate.

Commercial properties, residential properties (which can be rented out), and apartment buildings are all types of properties that are typically purchased or held for the purpose of generating rental income. Therefore, the gross multiplier method is a relevant and often used tool for appraising these types of income-generating assets.

Concepts Definitions

• Gross Multiplier Method (Gross Rent Multiplier - GRM): An appraisal method that estimates the value of income-producing property by multiplying its gross annual or monthly rental income by a factor derived from the sales of comparable rental properties.
• Commercial Property: Real estate zoned and used for business purposes, such as restaurants, office buildings, or retail centers, which typically generate rental income.
• Residential Property: Real estate primarily used for living, encompassing single-family homes, condominiums, townhouses, duplexes, triplexes, and fourplexes; these can be rented to generate income.
• Apartment Buildings: Multi-unit residential properties, often with five or more units, specifically intended for generating income through rental payments from tenants.
• Public Buildings: Structures like government offices, religious institutions, or educational facilities that are used for public service or non-profit purposes and generally do not generate rental income.
• Cost Approach to Value: An appraisal method that determines property value by estimating the cost to construct a replacement, subtracting any accrued depreciation, and then adding the estimated market value of the land. This method is often used for properties that do not generate income or have limited comparable sales, such as public buildings.