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 Henderson CAD in two sections:
- 2.1 Generally Accepted Appraisal Practices
- 2.2 Other Recommendations
2.1
Generally Accepted Appraisal Practices
The CAD must consider three general appraisal methods or approaches – cost, income and market – in determining the market value of property. The appraiser must use the method most appropriate to a particular property.
The CAD can find additional information about the approaches to determining or appraising value 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 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 contractor decide the proper method to use to appraise mineral and utility properties.
FINDING
Henderson CAD has a good set of appraisal manuals for appraisal staff that were developed to promote consistency in appraisal among appraisers.
The residential appraisal manual contains market-based building schedules. According to the CAD's senior appraiser, the schedules are updated annually based on sales information. To promote consistency among appraisers in the way they classify residential properties, photos of typical local residences within a given class are shown along with a written explanation of their attributes. Residential classes are determined by construction type, quality and size (square footage). The manual contains a depreciation table based on the property's effective age. The depreciation table conforms to the depreciation guidelines found in the Marshall and Swift Residential Cost Handbook. The manual also contains cost schedules for mobile homes.
The commercial appraisal manual contains class codes and descriptions for all commercial buildings in the CAD. The manual instructs the appraiser to recognize five major characteristics necessary to appraise commercial real estate: occupation, class, quality, depreciation and additives. The manual utilizes depreciation and life expectancy tables from the Marshall and Swift Commercial Valuation Guide. According to the commercial/personal property appraiser, the cost tables contained in the manual are updated annually to reflect current market values and building costs. The manual also contains an explanation of how the appraiser arrives at a capitalization rate when appraising property using the income approach to value.
The CAD uses the personal property tables in PTD's Field Appraisers' Guide (guide) to assist in the appraisal of personal property. According to the commercial/personal property appraiser, personal property values are largely based on taxpayer renditions. The appraiser reviews the renditions for reasonableness by comparing the rendered values to the tables in the guide and other personal property guide books, such as those by the National Automobile Dealers Association (NADA). He also indicated that he compares rendered values of similar businesses for consistency. In the absence of renditions, the CAD uses the guide by applying the quality and density tables to the square footage of the business. NADA guide books are used to appraise automobiles and commercial vehicles. According to the appraiser, personal property is discovered by reading the newspaper, phone book, word of mouth and by driving around the county. Rendition forms are mailed to all business owners every year. The commercial/personal property appraiser indicated that he attempts to inspect as much personal property annually as possible.
The Henderson CAD's land schedules are developed based on location and market conditions. Schedules are categorized by subdivision and abstract for rural acreage. The schedules note if the value tables represent price per acre, front foot, square foot or flat pricing. Land classification codes include waterfront, water view, off-water, channel front or acreage in transition. According to the senior appraiser, the land values are updated annually based on market sales.
The CAD has a manual describing the criteria necessary for appraising land based on agricultural or timber use. The agricultural/timber manual defines categories of land (improved pasture, dry land cropland, pine timber, etc.) and explains what is typical for Henderson County. The manual explains what factors define the degree of intensity needed for an agricultural operation in the county to qualify for the special evaluation. Guidelines for wildlife management, developed by the Texas Parks and Wildlife Department, are included in the manual. The CAD lies on the fringe of the East Texas timber producing area and has fewer than 30,000 acres qualifying for timber productivity. The CAD receives assistance from the Texas Forestry Service and local timber contractors in determining timber criteria. Written instructions for processing applications for agricultural/timber use can be found in the manual.
Property Tax Code Section 23.01 mandates that property be appraised by applying generally accepted appraisal methods and techniques. This section also requires appraisal districts to comply with USPAP 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. Appraisal manuals help ensure that these standards and requirements are attained.
COMMENDATION
The CAD has developed appraisal manuals for local procedures and practices that comply with USPAP to promote appraisal consistency within property categories.
FINDING
The CAD does not have written procedures for gathering and analyzing sales.
According to the senior appraiser, each appraiser is responsible for analyzing sales in his or her assigned region. According to the CAD's attorney, sales are analyzed by each appraiser and his or her supervisor. The CAD obtains sales data from sales letters sent to buyers, a real estate multiple listing service (MLS), fee appraisers, realtors, sales data shared by the state, builders and closing statements.
Appraisers record sales on data sheets for the subdivision or area of the county where the sales occur. Sales prices are compared with the property's current appraised value. Based on this market data, the appraiser determines if building schedules or land tables need to be adjusted. The data sheets are submitted to the senior appraiser for review and approval. If it is determined that schedules need to be changed, the senior appraiser makes the change in the computer system.
The CAD does not have written procedures for the sales analyses for this process. According to the CAD and the 2004 PVS, sales around Cedar Creek Lake are causing market values to accelerate rapidly. Cedar Creek Lake consists of property in both Mabank ISD and Malakoff ISD. These school districts received invalid findings in the 2004 PVS due in part to the CAD's failure to accurately reflect the market in its appraised values. Consistency in analyzing sales data and procedures for converting the market data into appraised values are important steps in achieving valid findings.
In its petition protesting the findings of the 2004 PVS in Mabank and Malakoff ISDs, the CAD stated that, based on sales, lake property values in the two school districts increased as much as 20 percent from Jan. 1, 2004, to Dec. 31, 2004. The CAD requested that all residential sales in the study be reduced 15 percent. The development of time adjustments is an important feature for any sales analysis. Written procedures help determine when to apply the time adjustment and the rate of adjustment to be used, which help CADs to accurately reflect the value of property as of the January 1 appraisal date. To adjust all sales by the same factor regardless of when the sale occurred would not give a true indication of the property's market value. Successful appraisal districts have procedures for analyzing sales to determine where increases or decreases are actually occurring, which benefits the CAD by promoting appraisal uniformity.
After the onsite visit, the CAD's attorney indicated:
It is clear to everyone in the appraisal department how sales are to be analyzed. A significant amount of taxpayer money is spent on education for and the training of appraisers to make this possible. Mabank and Malakoff ISD's were identified as being below market value in the PVS because the CPTD used sales in Category A that took place six to 11 months (June-November 2004) after the assessment date of Jan. 1, 2004. Additionally, Mabank ISD had three other categories tested, each of these categories used sales that took place between April 2003 and April 2004, and used Jan. 1, 2004, appraisal dates. The study indicates two categories with a ratio of 100 percent and one, Category D, at 88.66 percent. HCAD contests the Category D test because Eustace ISD and Malakoff ISD have Category D ratios of 1.0075 and 0.9664 respectively, and these ISD's are contiguous with the same land type, same use and the same value to buyers. Malakoff ISD had two other categories tested, Category C and D, and their ratios are 0.9832 and 0.9664 respectively. These categories were tested using sales that took place from February 2003 to May 2004 with one sample dated July 2004. If the [Comptroller] had conducted the PVS using sales in Category A that reflect January 1 values, Mabank and Malakoff ISDs would not have been identified as being appraised below market value. HCAD disagrees with this finding and requests that it be removed from this report.
The 2004 PVS used late sales because the district was identified as sales chasing in Category A in 2004, 2003 and 2002. Late sales are typically used in the PVS when a district is identified as sales chasing.
Written procedures ensure the market analyses are done consistently, regardless of changes in personnel. Knowing what analysis needs to be done, when to perform the analysis and how to perform it is key to maintaining continuity and a high level of appraisal performance.
The 2004 PVS contained sales that occurred after certification of the 2004 appraisal roll. This is an indication that the Comptroller has identified a lack of appraisal uniformity. Specifically, sold properties are being treated differently than unsold properties. Procedures for analyzing sales need to include measures that will prevent sold properties from being appraised at different levels of appraisal. Henderson CAD disputes this assessment, however. The CAD pointed out that Mabank and Malakoff ISDs filed suit in July 2005 against the Comptroller in district court, contending the results of the 2004 PVS are inaccurate and the CAD is appraising properties in these school districts at market value. The CAD "contends that it is accurately reflecting increase in the market" and that "the lawsuit alleges that the Comptroller is improperly using data during peak sales times later in the year as opposed to the applicable sales near January 1 of any given year."
Nueces CAD, for example, has well-written procedures for gathering and analyzing sales data. Staff receive sales data from a variety of sources, including an MLS, sales questionnaires, fee appraisals, title companies and the public. Its procedures outline the process for obtaining and analyzing local sales.
RECOMMENDATION 1
Establish written procedures for gathering and analyzing sales.
The chief appraiser needs to include sales analysis procedures in the appraisal procedures manual, to increase overall effectiveness of the appraisal program and ensure continuity in the appraisal district's performance.
FINDING
Henderson CAD is not using its ratio studies to effectively adjust appraisal practices.
Henderson CAD's computerized appraisal system allows the appraisal district to analyze its appraisals through ratio studies within and among property classifications. According to IAAO's Property Appraisal and Assessment Administration, a ratio study is a study of the relationship between appraised or assessed values and market values. Indicators of market values may be either sales or independent "expert" appraisals. Of common interest in ratio studies are the level and uniformity of the appraisals or assessments. The reviewer examined several ratio studies but focused on the studies in Mabank ISD and Malakoff ISD.
According to the chief appraiser, the appraisal district conducts ratio studies several times a year. The ratio studies are run within property categories, by school district and county to determine appraisal performance.
In the 2004 PVS, the final results indicated that homes in Malakoff ISD with appraised values less than $120,000 were appraised at about 82 percent of current market value. Homes in Mabank ISD valued at less than $106,000 were being appraised at about 85 percent of market value. Vacant lots in Malakoff ISD with values less than $11,250 were appraised at 79 percent of market value, while vacant lots in Mabank were not tested. Rural land in Malakoff ISD was appraised at 95 percent of market value, but rural land in Mabank ISD was appraised at 87 percent of market value. Countywide, the coefficient of dispersion (COD) among single-family residential sales to appraisal ratios was 15.23. The COD for vacant lots was 37.18, and 18.21 for rural real property. These statistical factors indicate uneven levels of appraisal. These appraisal weaknesses contributed to the invalid findings of Mabank and Malakoff ISDs.
Appraisal districts use ratio studies to plan appraisal maintenance programs. The ratio study results indicate those market areas in the appraisal district where 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 the market adjustment factor. The market adjustment factor is the percentage the appraisal district uses to adjust the appraisal schedules to reflect the market value.
Nueces CAD, for example, has a comprehensive ratio study system that allows proper reappraisal and maintenance planning. The CAD runs ratio studies within property classes, by school district and county at least quarterly to determine appraisal performance and adjust schedules as necessary. Frequent ratio studies and the appraisal maintenance that follows enable an appraisal district to keep its values at or near the market. Ratio studies are also used to determine actual appraisal performance of the district.
RECOMMENDATION 2
Conduct more in-depth analyses of ratio studies to eliminate unequal levels of appraisal within categories of property and to ensure all categories of property are being appraised at current market value.