Chapter 2
Findings of the Appraisal Standards Review
This chapter of the report addresses findings, commendations and recommendations from the appraisal standards review of the Austin CAD in two sections:
- 2.1 Generally Accepted Appraisal Practices
- 2.2 Other Recommendations
2.1
Generally Accepted Appraisal Practices
Three general appraisal methods or approaches–cost, income and market–must be considered in determining the market value of property. The appraiser must use the method most appropriate to a particular property.
Additional information about the approaches to determining or appraising value may be found in appraisal textbooks and IAAO Standards. Appraisers usually determine the value of producing mineral deposits, such as oil, gas and coal and the value of utility and commercial properties by using the income approach to value. Most appraisal districts contract with consultants to appraise mineral and utility properties. The chief appraiser can provide information that helps the contractor decide the proper method to use to appraise mineral and utility properties.
FINDING
Austin CAD has implemented a process to improve the accuracy of its appraisal records and appraiser productivity.
In July 2005, the chief appraiser eliminated the practice of appraisers entering their own updates of appraisal information and consolidated the appraisal data entry under one clerical position. Under the previous process, each appraiser printed out the property card; marked corrections and revisions on the card based on field work; updated the property record in the computer system to reflect the property record changes; and reviewed their data entry for quality and accuracy.
Under the new process each appraiser prints out the property card and marks corrections and changes to the card based on the field appraisal. The appraiser then submits the card with markups to the data entry clerk, who updates the computer system record and assigns appropriate codes such as subdivision codes. The data entry clerk prints out the revised record and submits it and the original (with markups) to the appraiser for review. The appraiser reviews the updated record for accuracy and notes any additional corrections. The data entry clerk enters the additional corrections and again prints out the updated record for review. This quality control process continues until the record is accurate.
The chief appraiser stated the new process has improved quality and consistency in the use of state codes such as subdivision codes and situs address entries. The new process has also increased appraiser productivity. The chief appraiser estimates that the CAD has gained about one day per week of appraiser time to focus on performing appraisals, rather than data entry.
COMMENDATION
Austin CAD improved accuracy and appraiser productivity by changing its appraisal record update process.
FINDING
Austin CAD's chief appraiser has implemented and strengthened sales data gathering practices to improve property valuations.
In 2005, PVS values for single-family residences were outside the accepted PTD confidence levels in Bellville ISD and Sealy ISD. Bellville ISD's mean ratio was 0.9023. The mean ratio for Sealy ISD was 0.9243.
The chief appraiser attributes lower local values for single-family residences to significant, unplanned increases in value because the CAD is in a high growth, "deep pocket" sales environment because of its proximity to Houston. The chief appraiser also attributed the lower values to the lack of access to sales data in the area. The CAD does not have access to a multiple listing service (MLS) covering its area to use a source for sales information, so sales data information is lagging.
Since his appointment in January 2005, the chief appraiser implemented several practices to improve sales data collection. The CAD previously sent letters only to the buyer to obtain sales information. The CAD now sends letters to both buyers and sellers to obtain sales information. In addition, CAD staff developed and improved relationships with appraisers and agents. The CAD also has received more sales information through the informal and formal protest processes.
In addition to sales data, the chief appraiser also updated the values in the land tables. The chief appraiser indicated the existing land tables were incorrect. He updated them to try to reach market value.
As a result of these changes, the difference between the CAD's market values and the actual sales price has significantly narrowed for single-family residences.
Exhibit 6 presents a comparison of 2004 median and mean prices for single-family residences in Bellville and Sealy ISDs to 2006 values.
Exhibit 6
Austin CAD Single Family Residence
Comparison of Market Values to Actual Sales Price
2004-2006
Bellville ISD
| Year | Median District Value | Median Actual Sales | Difference (District Value - Sales) | Median District Value | Median Actual Sales | Difference (District Value - Sales) |
|---|---|---|---|---|---|---|
| 2004 | $89,240 | $111,000 | ($21,760) | $93,458 | $116,244 | ($22,786) |
| 2006 | $124,660 | $124,000 | $660 | $142,149 | $145,357 | ($3,208) |
Sealy ISD
| Year | Median District Value | Median Actual Sales | Difference (District Value - Sales) | Median District Value | Median Actual Sales | Difference (District Value - Sales) |
|---|---|---|---|---|---|---|
| 2004 | $89,900 | $110,000 | ($20,100) | $99,568 | $126,771 | ($27,203) |
| 2006 | $117,565 | $120,000 | ($2,435) | $130,878 | $134,261 | ($3,383) |
Source: Austin CAD, November 2006.
COMMENDATION
Austin CAD improved residential appraisal accuracy by strengthening sales data gathering practices.
FINDING
Austin CAD does not adapt the cost information from its cost estimator service to reflect local conditions needed to accurately estimate its construction values.
The appraisal district has a subscription to the cost service provided by Marshall & Swift, a nationally-recognized cost estimator service. Austin CAD appraisers extensively use Marshall & Swift's cost guide in the cost approach appraisal method to determine the value of new construction.
Since the cost guide does not include cost data from smaller, non-urban areas, the chief appraiser said the CAD uses Houston building costs in its appraisals. The CAD does not survey local builders, benchmark to other similarly situated appraisal districts or use other cost sources such as the Blue Book of Building and Construction to develop a local cost modifier for use in the Austin CAD area.
The Houston area has more developers and construction firms than Austin County, with more competitive construction rates. The CAD's reliance on the published cost rates without applying a local modifier results in new construction estimates that are inaccurate. Not adapting the construction estimates contributed to Bellville and Sealy ISD's single-family residences being appraised at values other than market value and endangering full state funding for both ISDs. By using a local modifier, the CAD can help ensure that CAD staff performs accurate cost approach appraisals and that property owners receive equitable value.
Generally accepted appraisal practices recommend that appraisers use all available methods to confirm and adapt appraisal models for local conditions. USPAP Standards Rule 6-1 (a) states that in performing mass appraisals, an appraiser must be aware of, understand and correctly employ those recognized methods and techniques necessary to produce a credible mass appraisal.
RECOMMENDATION 1
Develop and use a local modifier to adapt construction estimating data to accurately reflect construction values.
FINDING
Austin CAD's written reappraisal plan does not have sufficient information to meet Property Tax Code, USPAP or IAAO requirements.
Beginning in 2006, Property Tax Code Section 6.05(i) requires an appraisal district board to develop a biennial written plan for the periodic reappraisal of all property within the appraisal district boundaries and to hold a public hearing to consider the proposed plan. Each appraisal district must implement a plan that provides for the reappraisal activities for all appraisal district real and personal property at least once every three years.
Austin CAD developed its reappraisal plan for tax years 2007 and 2008 in September 2006. The board held a public hearing on Sept. 21, 2006 and adopted the plan during the regularly scheduled meeting held after the public hearing. The CAD sent the plan to its taxing entities on Nov. 7, 2006. According to the chief appraiser, the CAD did not previously have a written reappraisal plan and had been reappraising all property every four to six years instead of the three years required by statute.
According to Property Tax Code Section 25.18, a functional reappraisal plan must include the following activities:
(a) Each appraisal office shall implement a plan for periodic reappraisal of property approved by the board of directors under Sec 6.05(i).
(b) The plan shall provide for the following reappraisal activities for all real and personal property in the district at least once every three years:
(1) identifying properties to be appraised through physical inspection or by other reliable means of identification, including deeds or other legal documentation, aerial photographs, land-based photographs, surveys, maps and property sketches;
(2) identifying and updating relevant characteristics of each property in the appraisal records;
(3) defining market areas in the district;
(4) identifying property characteristics that affect property value in each market area, including:
(A) the location and market area of property;
(B) physical attributes of property, such as size, age and condition;
(C) legal and economic attributes; and
(D) easements, covenants, leases, reservations, contracts, declarations, special assessments, ordinances or legal restrictions;
(5) developing an appraisal model that reflects the relationship among the characteristics affecting value in each market area and determines the contribution of individual property characteristics;
(6) applying the conclusions reflected in the model to the characteristics of the properties being appraised; and
(7) reviewing the appraisal results to determine value.
USPAP Standards Rule 6-2(g), requires appraisers to identify the characteristics of the properties that are relevant to the purpose and intended use of the mass appraisal. To comply with this standard, appraisal districts typically record property characteristics that include the:
- Comptroller's property category code;
- location and market area of property;
- physical attributes of the property such as the size, age, condition and construction type;
- number of various kinds of rooms such as bedrooms, bathrooms, etc.;
- presence of amenities such as central air conditioning;
- legal and economic attributes or restraints; and
- presence of easements, covenants, leases, special appraisals, ordinances or other legal restrictions.
The IAAO textbook, Property Appraisal and Assessment Administration, Chapter 13, Mass Appraisal states that the required activities for all reappraisals must include the following steps in the order given:
- Performance Analysis - Determines whether or not the values are consistent with the market and if the values are equitable and that ratio studies are the primary tool for the analysis.
- Reappraisal Decision - Use statutes or administrative rules. This may include a cyclical schedule in which jurisdictions are physically reviewed and revalued. It is also noted that the reappraisal requires careful planning along with a major commitment of resources.
- Analysis of Available Resources - This step is performed before defining goals and objectives. This includes evaluating the staff, budget, existing systems and practices, data processing support and existing data and maps. The publication also stresses that an adequate budget is crucial in that it can overcome deficits in other areas.
- Planning and Organization - IAAO emphasizes that this is the most important aspect of reappraisal as it identifies the target completion date and performance objective, specific plan of action and timeline. The plan should also include definitions of critical activities with completion dates, assignment of responsibilities, and establishes data collection and field work standards.
- System Development - This produces the procedures, methods, manuals, and software for the mass appraisal system.
- Pilot Study - This study tests procedures in several portions of the jurisdiction. It should include a ratio study to verify if the system produces reliable and accurate values and point out needed modifications.
- Data Collection - After procedures and forms are made, tested and approved the data collection can start. IAAO stresses that quality control is essential.
- Production of Values - This begins with a market analysis, model development, model calibration and calculation of preliminary values. The ratio study then assesses the consistency and validity of the values between each property type and area. After the models provide acceptable results, they can be used to produce values.
- Preparation of Appraisal Roll.
- Final Performance Analysis.
- Data Maintenance.
- Value Updates.
The CAD's reappraisal plan is a 21-page document that contains many of the elements required by the Property Tax Code. Sections of the plan cover topics such as the reappraisal cycle, annual activities, identifying and updating relevant property characteristics, valuation methods by property type, the mass appraisal report and value defense. Each of these topics generally describes the activities that will be performed. The sections do not describe in detail, however, how the reappraisal activities will be performed, the resources that are allocated or the specific timelines and markets that will be reviewed.
The plan states that Austin CAD will conduct a complete appraisal analysis of all properties in the district and will update property values as necessary. It alludes to market areas, but does not provide specific market definitions such as the city of Bellville.
The reappraisal plan also does not consistently identify the property characteristics affecting property value in each area. For residential property, the plan identifies factors such as location, traffic and size affecting the land valuation component. It does not identify similar factors for the building component such as size, age, condition or construction type. Similarly, the plan does not identify the relevant characteristics of each property to be appraised and how the district's appraisal records will be updated with the characteristics.
The plan identifies the resources for conducting reappraisals as the 14 positions in the CAD's 2007 budget. It lists all of the classifications, which include tax collections staff. It does not specifically link or identify the resources to be used for the reappraisals of each type of property. With respect to timelines, several activities list time frames, rather than fixed dates for the reappraisal activities. For example, the plan states that the valuation process begins by September and that the reappraisal activities will likely occur from September to April.
A comprehensive reappraisal plan explains how and when the appraisal district plans to perform each of the activities mentioned by the Property Tax Code. A well-executed reappraisal plan ensures that each school district's values are valid in the PVS, so the school districts receive their appropriate amount of state funding. It also ensures uniform and fair taxpayer treatment in the payment of property taxes.
Nueces CAD, for example, has detailed reappraisal plans called time action plans for each appraisal department. The plans call for the reappraisal of all real property at least once every three years and annual inspections of business personal property. Each reappraisal plan provides information as to the steps performed, timelines, staffing levels and a workflow analysis culminating in certified appraised values. The plans for residential and commercial properties list specific procedures for determining how the appraisal district should use sales in reappraising property and how it should use the internal ratio study to determine the need for reappraisals in each market area.
RECOMMENDATION 2
Revise the biennial reappraisal plan to include information required by the Property Tax Code.
FINDING
Austin CAD's appraisal manual does not have detailed procedures to guide staff in consistently performing appraisal activities.
The appraisal manual does not contain comprehensive written procedures to guide appraisers in performing fieldwork, in determining how to apply the depreciation tables found in the manual, in performing an appraisal using the cost approach or in the proper use of the photos contained in the manual to make valuation decisions.
The chief appraiser revised Austin CAD's existing appraisal manual in 2006. The revised manual includes sections for residential, mobile homes and multi-family structures (duplexes, triplexes, fourplexes and apartments). Each section describes the quality classes applicable to that particular property category and includes photos that reflect each quality class. The residential section also contains a quality rating system to assign points based on the type of frame and veneer used on a house; a construction detail diagram identifying 113 key construction details; a residential depreciation table; and a percent of completion guideline for estimating residential construction.
The manual also lists computer system codes related to improvements, construction, land and property. Examples include: improvement type, improvement segment class, method and type, construction style, exterior walls, foundation, flooring, land and property.
The remainder of the manual includes a one-page personal property depreciation matrix, two pages referring the user to the CAD's computer system for residential and commercial cost tables, and a field appraiser's guide identifying the values for various types of commercial personal property.
After reviewing the draft ASR report, the chief appraiser supplied a document titled Field Appraiser's Instructions that was added to the Austin CAD appraisal manual. This document discusses the importance of recording accurate information on appraisal cards and on-site behavior of field appraisers. It does not, however, give any instruction on appraisals in the field, on applying depreciation tables, on using the cost approach or on using photos and information contained in the appraisal manual to make valuation decisions.
A comprehensive appraisal manual outlines the steps that appraisers need to perform during fieldwork to gather specific information about properties such as the age, condition construction details and physical dimensions of the building or the dimension, shape and location of the land on which the real property is found.
Property Tax Code Section 23.01 requires that property be appraised by applying generally accepted appraisal methods and techniques.
Jefferson CAD, for example, has a detailed operations manual to ensure that its staff consistently follows proper procedures in appraising property. The manual outlines the steps for appraiser to follow in gathering specific information about properties and the land on which they are located. The CAD's supervising appraisers use the written appraisal procedures manual to teach the appraisal staff how to be consistent in the appraisal of property. The appraisal procedure manual is also useful as evidence during appraisal review board hearings and for demonstrating that the district is complying with its own policies.
RECOMMENDATION 3
Revise the appraisal manual to include complete procedures for conducting fieldwork activities, applying depreciation and performing the cost approach in valuing properties.
FINDING
The CAD does not perform a trend analysis of its ratio studies to forecast market trends.
A ratio study examines the relationship between market values and appraised or assessed values. Sales or independent appraisals may be indicators of market values. Appraisal districts use ratio studies to identify market areas whose appraised values no longer reflect the market and that may be contributing to insufficient market values in the PVS. In such cases, the appraisal district can use the results to revise appraised values to bring them closer to market value. Third parties also can use ratio studies to determine the appraisal district's actual appraisal performance.
The chief appraiser said that he and the director of operations perform internal ratio studies monthly using the CAD's computerized appraisal system. Each year from February until April, they perform ratio studies weekly to further refine the values before the CAD sends valuation notices.
The CAD's computerized appraisal system allows it to perform ratio studies within and among property classifications. The study includes analyzing each identified neighborhood for low and high values, median, mean, weighted mean, standard deviation, coefficient of dispersion and variation. The chief appraiser and director of operations analyze these factors based on sales price and estimated market value by the CAD.
The CAD provided examples of the studies to the PTD for review. The chief appraiser indicated that he increases the value opinion when he determines the market is increasing. He confirmed that he does not perform any type of trend analysis of ratio study results over a period of time as a means to forecast trends and adjust values more quickly.
After reviewing the draft ASR, the chief appraiser stated that "ratio studies are conducted many times throughout the year. It has not been the practice of the appraisal district to track market trends on a quarterly or semi-annual basis, however we have the ability to comply with this analysis. Also, by conducting ratios regularly we would be able to detect such a trend."
In a CAD with significant growth such as Austin CAD, a trend analysis of ratio study results that is performed on a scheduled basis, such as quarterly or semi-annually, allows the chief appraiser to more quickly forecast market movement, which allows the chief appraiser to responsively determine whether or how much to adjust or modify local schedules. Without trend analysis, the CAD may delay needed adjustments, which can cause the CAD's values to fall outside accepted PVS ranges. The results of a trend analysis may also assist in the appeal process to show the taxpayer how values have changed over time.
USPAP Standards Rule 6-3 (a, c) requires an appraiser to identify the appropriate procedures and market information required to perform the mass appraisal, including all physical, functional and external market factors as they may affect the appraisal and to use recognized techniques for calibrating mass appraisal models. Routinely analyzing the ratio studies results will assist in the identification of information needed to calibrate the CAD's mass appraisal models.
RECOMMENDATION 4
The CAD should work with its software vendor to create a formal trend analysis procedure to assist the CAD with reappraisal planning.