Chapter 2
Findings of the Appraisal Standards Review
This chapter of the report addresses findings, commendations and recommendations from the ASR of the Bandera CAD in two sections:
- 2.1 Generally Accepted Appraisal Practices
- 2.2 Other Recommendations
2.1
Generally Accepted Appraisal Practices
There are three general appraisal methods or approaches–cost, income and market–that a chief appraiser must consider in determining the market value of property. The chief appraiser must use the method most appropriate in appraising a particular property.
Appraisal textbooks and IAAO Standards provide additional information about the approaches to determining or appraising value. Appraisers usually determine the value of producing mineral deposits, such as oil, gas and coal, and the value of many 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 contractors decide the proper method to use in appraising mineral and utility properties.
FINDING
Bandera CAD lacks a comprehensive written reappraisal plan.
Bandera CAD had no reappraisal plan when it hired the current chief appraiser in March 2004. Since that time, the CAD has implemented work plans that are not fully developed. The chief appraiser has made extensive changes in the way Bandera CAD appraises all property types, including identification of various market areas designated for reappraisal. The chief appraiser designated these areas based on property characteristics, such as neighborhood grouping or property type.
The chief appraiser is working on a comprehensive reappraisal plan that complies with the requirements of Property Tax Code Sections 6.05(i) and 25.18. However, the written draft plan presented during the on-site visit in March 2006 consisted primarily of general descriptions and definitions of different types of appraisal procedures. Property Tax Code Section 25.18 requires that:
(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 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.
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; and
- Value Updates.
The lack of a comprehensive reappraisal plan contributed to an invalid finding for Bandera ISD's 2004 PVS and invalid finding for Bandera, Medina and Utopia ISDs' in the 2005 preliminary PVS. Instead of using accepted industry appraisal methods, Bandera CAD used individual property sales or "sales chasing" to assure property values met PVS guidelines. The CAD has stopped this practice but the CAD has not fully implemented accepted appraisal methods for all category types to ensure appropriate values. Categories D and F ratios were still lower than the desired 0.95 ratio in all three school districts in the 2005 preliminary PVS.
A detailed written reappraisal plan helps to ensure consistent and accurate appraisals and as a single written document guides staff in performing appraisals. This benefits Bandera CAD, which has staff who lack experience in the new procedural changes.
The primary function of every appraisal district is to appraise all taxable property equally and uniformly at market value. The chief appraiser and appraisal district staff are responsible for the day-to-day operations of the appraisal district, but the board must adequately plan to accomplish these objectives and establish policies that serve as clear directives to the chief appraiser and staff.
A thorough reappraisal plan discusses how and when the appraisal district plans to perform each of the activities mentioned above. A reappraisal plan, if executed properly, will help ensure that values in each school district are valid in the PVS, thereby avoiding the possibility of a school district receiving less than the expected amount of funding from the state. A comprehensive and properly executed plan also ensures uniform and fair treatment of taxpayers in the payment of property taxes.
Nueces CAD, for example, has detailed reappraisal plans, referred to as time action plans, for each appraisal department within the CAD. The plans call for the reappraisal of all real property at least once every three years and the annual inspection of business personal property. Each reappraisal plan gives detail 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 CAD uses sales in reappraising property in each market area and how the appraisal district's internal ratio study is used to determine the need for reappraisal in each market area.
RECOMMENDATION 1
Complete, adopt and implement a reappraisal plan, as required by the Property Tax Code Sections 6.05(i) and 25.18.
FINDING
Bandera CAD lacks documented procedures to perform commercial and personal property appraisals as provided by Texas Property Tax Code Section 5.05(a).
This section of the code provides that the Comptroller may prepare and issue publications relating to the appraisal of property and the administration of taxes, or may approve other publications relating to those matters, including materials published by The Appraisal Foundation, the International Association of Assessing Officers (IAAO) or other professionally recognized organizations, for use in the administration of property taxes.
In 1992, the Comptroller's Office issued a letter directive to appraisal districts that the IAAO's publication entitled Property Appraisal and Assessment Administration, 1990 Edition (the Red Book) would serve as the Comptroller's official appraisal guide. This book presents a comprehensive treatment of assessment administration.
Chapter One of the Red Book notes that standards of practice may incorporate or be contained in laws, regulations, policy memoranda, procedural manuals and guidelines, appraisal manuals and schedules. It adds that guidelines or manuals should include repeated tasks, particularly those done by more than one person. The publication further states that there needs to be a procedure for establishing standards of practice that include updating manuals on a regular basis. Performance and progress reviews contribute to effective and efficient operations of appraisal districts. Procedures are required for monitoring the quality of appraisals, editing data and reviewing appraisals.
Standards of practice include:
- manuals - establish work procedures;
- procedures - promote uniformity of approach to tasks;
- policy memoranda - set performance goals; and
- forms.
Appraisal procedures for all property types are especially essential for appraisal districts that have or continue to experience significant staff turnover, which is the case in the Bandera CAD.
The chief appraiser has focused primarily on improving appraisals for residential property and has taken steps to use proper appraisal techniques through fieldwork for residential properties. The CAD, however, has not developed procedures for appraising commercial and personal properties.
Residential properties are appraised using in-house cost-based schedules and local sales. A detailed presentation of previously analyzed sales is included in the 2004 and 2005 Ratio/Analysis book assembled by the chief appraiser. The residential appraisal manual includes class descriptions with detailed descriptions of different types of houses. The CAD also relies on Marshall & Swift (M&S) schedules as a benchmark for all residential classifications. A section outlines detailed procedures that focus on identifying property attributes, charts for various cost schedules and when to apply a local modifier for the outlined market areas.
There is no similarly detailed manual for commercial, land or personal property appraisal. The chief appraiser has the responsibility for the data collection for commercial property and uses a generalized manual for commercial appraisal. The CAD does not use the income approach in the appraisal process, but the chief appraiser plans to incorporate this approach into the system. Bandera CAD contracts with a vendor for complex utility property account appraisals.
The CAD has one schedule for agricultural values and a spreadsheet for rural land sales; however, there is no detail on how to evaluate commercial land sales.
The CAD lacks a personal property appraiser. Field appraisers divide the valuation for personal property. The CAD does not routinely physically inspect business personal property annually and has not established an independent valuation method, as recommended by industry standards, to comply with law.
Staff routinely research personal property valuation through the business section of the phone book, advertisements, billboards and county and state records. The CAD mails rendition forms to business owners annually. The CAD uses values rendered by the property owner and Bandera CAD schedules to appraise business personal property. Bandera CAD has not developed a local appraisal manual, but instead relies on the Comptroller's Field Appraiser's Guide that is five years out of date. This manual is no longer in publication and was never intended for use by CADs as a standalone manual. It was intended only as a tool for use in establishing local procedures.
The staff appraiser reviews renditions for reasonableness by comparing the rendered values to the schedules in the out of date Field Appraiser's Guide and the CAD's guide. PTD does not direct appraisal districts on how to appraise property, what schedules to use and how much depreciation to apply; therefore, CADs should not rely on the Comptroller's Field Appraiser's Guide.
If the CAD does not receive a rendition, it contacts non-rendering businesses and encourages them to render their property. If the CAD still does not receive renditions, it uses the Comptroller's personal property schedules for valuation, which as indicated above are out of date and not intended for this use. The CAD conducts on-site visits when possible.
The CAD does not use a software program to derive a market value for personal property; instead, it performs valuation estimates manually.
Lack of annual inspections and independent valuation can result in inaccurate and inequitable appraisals. IAAO's Standard on Valuation of Personal Property recommends that an appraiser establish an audit program to verify that all reported personal property items and the information given is accurate.
Property Tax Code Section 22.07(a) gives the chief appraiser or a designated authorized representative permission to enter the premises of a business, trade or profession and inspect the property to determine the existence and market value of tangible personal property used for the production of income and having a taxable situs in the CAD.
Property Tax Code Section 23.01 mandates CADs appraise property by applying generally accepted appraisal methods and techniques. This section also requires appraisal districts to comply with the USPAP standards and requires similar appraisal methods and techniques be applied to the same or similar properties while taking care to account for the contributions of individual property characteristics on value.
Nueces CAD, for example, also has written procedures for valuing commercial, residential, rural and agricultural land. The procedures include staff responsibilities, valuation methods, market analysis procedures and guidelines for open space land valuations. The Commercial Procedures Manual discusses when and how to use the three approaches for valuing commercial properties – cost, market and income. It contains a classification guide showing pictures of various types of commercial buildings. This assists the commercial appraiser in being uniform and consistent in classifying these properties. The Personal Property Procedures Manual contains the job descriptions and assignments. The manual outlines the discovery process and contains valuation schedules.
RECOMMENDATION 2
Develop complete appraisal manuals for use in performing commercial and personal property appraisals.
The manuals should include provisions for attempting to physically inspect all business personal property accounts.
FINDING
Bandera CAD's market analysis and ratio studies have been insufficient to address valuation issues adequately in a changing market.
The chief appraiser reported that the CAD researched sales through local brokers, appraisers and deed letters to obtain sales information. Bexar County MLS is also available to the CAD; but the chief appraiser indicated that there is no regular schedule for obtaining Bexar County MLS from its source. In addition, the out-of-date schedules have contributed to the lack of updated market information. This is particularly important in an area like Bandera County, where rural land valuation by the CAD is a large contributor to the overall tax base, making an accurate assessment vital to the success of the CAD's ability to generate accurate market values.
The interim chief appraiser in 2004 presented data directly from the Comptroller's Web site, as well as from what appears to be internally produced ratios performed quarterly.
Exhibit 6 lists the property categories that fell outside of the confidence intervals for the school districts.
Exhibit 6
Stratified Ratio Detail: Bandera and Medina ISDs - 2004 PVS
| School District | Category/Stratum | Local Stratum Value | PVS Stratum Value | Confidence Interval Ratio |
|---|---|---|---|---|
| Bandera | D | $225,192,238 | $258,070,358 | 0.8726 |
| Bandera | A | $368,634,406 | $393,587,877 | 0.9366 |
| Medina | D | $97,771,265 | $103,193,054 | 0.9475 |
Source: Texas Comptroller of Public Accounts, 2004 Property Value Study.
PTD identified three categories outside the acceptable ratio range; however, Category A in Bandera ISD and Category D in Medina ISD appear to be off by only a small amount. The main category that caused Bandera ISD to fall out of the acceptable ratio range for 2004 is in Category D (Real Property: Acreage). The PVS for 2004 indicates that the Bandera ISD ratio was at 0.8726. Category A, Real Property: Single-Family Residential was just slightly out of the acceptable ratio range at 0.9366, as was the Medina ISD for Category D at 0.9475.
These limited efforts to perform ratio studies may have contributed to CAD values falling below the confidence interval for Bandera ISD.
Appraisal districts use various methods to overcome the lack of available information about markets and market activity. Some appraisal districts plot sales on maps to determine if physical boundaries, location or topography influences markets. Additional research often focuses on, but is not limited to, factors such as planned use, road access, financing, view and access to water for recreational purposes, to name a few factors.
Using the results of this research, appraisers can identify the boundaries of each market and the property characteristics that influence value. They also can perform ratio studies of each market to determine whether or how much to adjust or modify local schedules.
A ratio study is a an analysis of the relationship between appraised values and market values. Indicators of market values may be either sales or independent appraisals. The level and uniformity of the appraisals are of common interest in ratio studies.
Appraisal districts use ratio studies to plan appraisal maintenance programs. The ratio study results indicate those market areas in the appraisal district whose values no longer reflect the market. If the ratio study in a market area shows the appraised values do not reflect the market, the appraisal district appraises the available sales to determine why its appraisal schedules may be incorrect. This may lead to schedule corrections that result in appraised values that are closer to market value.
Frequent ratio studies and the appraisal maintenance that follows it, enable an appraisal district to keep its values at or near the market. Third parties also use ratio studies to determine actual appraisal performance of the appraisal district.
Nueces CAD, for example, has a computerized appraisal system and conducts ratio studies within property classes by school district and county to determine appraisal performance. The CAD bases reappraisal and value maintenance decisions for some properties or locations on the ratio study results.
RECOMMENDATION 3
Prepare and analyze ratio studies frequently to identify areas of concern and take corrective actions to mitigate issues of value.