A residential subdivision has absorbed 120 units over the past 18 months. Based on this historical data, how long would it take to sell 80 remaining lots?
Correct Answer
C) 12 months
Why this is correct: Absorption analysis estimates the time needed to sell inventory based on past sales pace. First, calculate the monthly absorption rate: Total units sold (120) divided by the period (18 months) equals 120 ÷ 18 = 6.666... (or 6.67) units per month. Then, project the time to sell the remaining 80 lots: Remaining units (80) divided by the monthly rate (6.67) equals 80 ÷ 6.67 ≈ 12 months. Why the other choices are wrong: "10 months" might result from using an incorrect absorption rate (e.g., 8 units/month from 120/15). "14 months" could come from a miscalculation like 80/(120/12) or rounding errors. "16 months" might arise from reversing the formula (18/120*80) or using an annual rate incorrectly. Exam tip: Absorption rate = Units Sold / Time Period. Marketing time = Remaining Inventory / Absorption Rate. Keep units consistent (monthly).
Why This Is the Correct Answer
Option B is correct because it follows the proper two-step absorption rate calculation. First, calculate the monthly absorption rate: 120 units ÷ 18 months = 6.67 units per month. Second, divide the remaining inventory by the monthly rate: 80 units ÷ 6.67 units per month = 12 months. This straightforward mathematical approach provides the most accurate projection based on historical performance.
Why the Other Options Are Wrong
Option A: 10 months
Option A (10 months) underestimates the time needed by using an incorrect absorption rate of 8 units per month (80 ÷ 10 = 8), which is higher than the actual historical rate of 6.67 units per month.
Option B: 14 months
Option B (14 months) overestimates the time by using an absorption rate of approximately 5.71 units per month (80 ÷ 14 = 5.71), which is lower than the actual historical rate of 6.67 units per month.
Option D: 16 months
Option D (16 months) significantly overestimates the time by using an absorption rate of 5 units per month (80 ÷ 16 = 5), which substantially undervalues the historical absorption performance.
The A-R-T Formula
A-R-T: Absorption Rate = Total units ÷ Time period, then Remaining units ÷ Rate = Time needed. Think 'ART' - you're creating the 'art' of market timing prediction.
How to use: When you see absorption rate questions, immediately think A-R-T: first find the Absorption Rate by dividing total units by time, then divide Remaining units by that Rate to get Time needed.
Exam Tip
Always work in consistent time units (months to months, years to years) and double-check your division by multiplying your answer back - 12 months × 6.67 units/month should approximately equal 80 units.
Common Mistakes to Avoid
- -Confusing the order of division - dividing time by units instead of units by time
- -Using inconsistent time periods - mixing months and years in calculations
- -Forgetting to calculate the absorption rate first before projecting future sales
Concept Deep Dive
Analysis
This question tests the fundamental concept of absorption rate analysis, which is critical for market analysis in real estate appraisal. Absorption rate measures how quickly properties sell in a given market over a specific time period, providing insight into market velocity and demand. The calculation involves determining the average monthly absorption rate from historical data and then projecting future sales based on this rate. This metric is essential for developers, investors, and appraisers to understand market timing and feasibility of projects.
Background Knowledge
Absorption rate is a key market indicator that measures the rate at which available properties are sold in a specific market during a given time period. It's calculated by dividing the number of units sold by the time period, typically expressed as units per month or per year. This metric helps appraisers assess market conditions, predict future sales velocity, and determine appropriate marketing periods for valuation purposes.
Real-World Application
Appraisers use absorption rates when valuing subdivision developments, determining marketing time assumptions for appraisal reports, and advising clients on project feasibility. For example, if a developer wants to know when they'll recoup their investment, the absorption rate helps predict cash flow timing.
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