A residential market area had 240 annual closed competitive sales and an average competitive inventory of 80 units. What is the annual market turnover rate of the inventory?
Correct Answer
C) 3.0 turns per year
Turnover = 240 annual closed sales / 80 average inventory = 3 turns/year. Use the same population, period and price/listing definition throughout. Common errors: inverting the ratio (inventory ÷ sales) gives 0.3 turns per year; adding the inventory to the sales gives 4.0 turns per year; dividing the sales by sales plus inventory gives 0.8 turns per year.
Why This Is the Correct Answer
Option C is correct because turnover = 240 annual closed sales / 80 average inventory = 3.0 turns per year. Turnover puts sales in the numerator and average inventory in the denominator. Both figures should cover the same population and period.
Why the Other Options Are Wrong
Option A: 0.3 turns per year
Option A, 0.3 turns per year, comes from inverting the ratio: 80 / 240 = 0.33. Turnover divides sales by inventory, so the correct figure is 240 / 80 = 3.0.
Option B: 0.8 turns per year
Option B, 0.8 turns per year, divides the sales by the sales plus the inventory: 240 / (240 + 80) = 0.75, or about 0.8. Turnover divides sales by average inventory alone, so the correct figure is 240 / 80 = 3.0.
Option D: 4.0 turns per year
Option D, 4.0 turns per year, comes from adding the inventory to the sales: (240 + 80) / 80 = 4.0. Turnover uses sales alone in the numerator, so the correct figure is 240 / 80 = 3.0.
Sold over Stock
Turnover is Sold over Stock: put what sold on top and the stock on hand underneath.
How to use: Use 'Sold over Stock' to keep the ratio from being inverted when computing turnover.
Exam Tip
Put sales in the numerator and average inventory in the denominator; a result below 1 here would mean less than one full turn of inventory a year, which does not fit 240 sales against 80 listings.
Common Mistakes to Avoid
- -Dividing inventory by sales instead of sales by inventory
- -Adding inventory to sales in the numerator or denominator
- -Mixing sales and inventory from different market segments or periods
Concept Deep Dive
Analysis
This question tests applying the turnover ratio correctly: turnover equals annual closed competitive sales divided by average competitive inventory. With 240 sales and 80 average inventory, the inventory turns over 3 times a year. The distractors come from inverting the ratio or adding the inventory to the sales in the numerator or the denominator.
Background Knowledge
Turnover measures how many times the average inventory is sold during a year and is a sign of market velocity. Higher turnover generally points to a faster-moving market. Like months of supply and absorption, it is meaningful only when sales and inventory use the same competitive population and definitions.
Real-World Application
An appraiser studying a suburban condominium market finds 240 closed sales last year and an average of 80 competing units listed. A turnover of 3 times a year supports describing the market as active in the market conditions analysis.
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