Chapter 2
Findings of the Appraisal Standards Review
This chapter of the report addresses commendations, findings and recommendations from the appraisal standards review of the Mitchell CAD in three sections:
2.1 Commendable Practice
2.2 Key Findings and Recommendations
2.3 Other Recommendation
2.1
Commendable Practice
As part of its review process, PTAD identifies best practices used by each CAD under review. These commendable practices improve efficiency or in some instances address past operational weaknesses. We commend Mitchell CAD for its efforts and hope this commendation gives other appraisal districts ideas for improving their own operations.
FINDING
Mitchell CAD's appraisal review board (ARB) provides taxpayers with useful and effective information for protesting real and personal property appraisals.
Property Tax Code Section 41.66(a) requires ARBs to establish hearing procedures and states the following:
(a) The appraisal review board shall establish by rule the procedures for hearings it conducts as provided by Subchapters A and C of this chapter. On request made by a property owner in the owner's notice of protest or in a separate writing delivered to the appraisal review board on or before the date the notice of protest is filed, the property owner is entitled to a copy of the hearing procedures. The copy of the hearing procedures shall be delivered to the property owner not later than the 10th day before the date the hearing on the protest begins and may be delivered with the notice of the protest hearing required under Section 41.46(a). The notice of protest form prescribed by the comptroller under Section 41.44(d) or any other notice of protest form made available to a property owner by the appraisal review board or the appraisal office shall provide the property owner an opportunity to make or decline to make a request under this subsection. The appraisal review board shall post a copy of the hearing procedures in a prominent place in the room in which the hearing is held.
In addition to the hearing procedures required by law, the chief appraiser, in 1998, developed guidelines and suggestions for taxpayers to use in preparing and presenting a protest to the appraisal review board. This information is posted in the hearings room and included in the packet mailed to all taxpayers filing a protest. The packet also includes the necessary forms and a copy of the Comptroller's publication Taxpayer's Rights, Remedies and Responsibilities. Ninety-four protests were filed in 2006 and 65 were filed in 2007.
The ARB's guidelines and suggestions for appellants include the following:
- be on time;
- stick to the facts;
- be direct and concise;
- file property renditions before April 15;
- file protests in a timely manner; and
- prepare evidence for the board including:
- pictures/photographs of properties
- comparable sales
- closing statements
- renditions
- financial statements
Hearing procedures describe the hearing process and include:
- how protests are tracked by the board;
- assignment of hearing dates;
- prohibition of communication between parties and appraisal review board members;
- use of agents and affidavits;
- recommended hearing length – 15 minutes, if possible;
- administering oath to all parties presenting evidence;
- procedural order of the hearing, beginning with taxpayer evidence and arguments;
- cross examination procedures; and
- board decisions and written notice.
ARB hearings of taxpayer protests must support the attainment of public policy goals established by law and by the Property Tax Code. The process must ensure the efficient use of public resources. By providing property owners who are protesting their appraisal value with concise documentation on how to prepare and present evidence for a protest, Mitchell CAD and its appraisal review board enhance the efficiency of the appeals process by doing the following:
- providing valuable taxpayer service and assistance;
- apprising tax protesters of their rights and responsibilities; and
- decreasing the potential for occurrences of prohibited forms of communication between parties.
The appeals process itself must have integrity, fairness and openness to maintain the public's trust. As a result of the CAD's disseminating – by request or statute – not only documentation on the appeals hearing process and procedures, but allowable written communications like the chief appraiser's guidelines and suggestions to appellants, the CAD meets or exceeds standards set by the Property Tax Code. The ARB process in Mitchell CAD is accountable for public resources through the transparency of its operations, which is necessary to maintain the public's trust.
COMMENDATION
The Mitchell CAD ARB prepares taxpayers for protest hearings by providing them with publicly available documentation of the hearing process and procedures and the ARB's guidelines and suggestions for presenting protests, which enhances the transparency of its process for handling taxpayer protests.
2.2
Key Findings and Recommendations
As part of the review process, PTAD makes recommendations to address challenges identified during its review of a CAD. Below are recommendations addressing key challenges associated with Mitchell CAD's appraisal activities.
The CAD's current reappraisal plan was approved by the board of directors in September 2006. The plan indicates the CAD uses a three-year reappraisal cycle with Westbrook ISD to be reappraised in 2007 and Loraine ISD to be reappraised in 2008. The plan contains a calendar of tax year events and discusses the reappraisal process suggested by IAAO and USPAP. The CAD indicated that it produces working copies of appraisal cards for all properties of a given school district in the reappraisal year and tracks the performance of all field work by generating reports showing last appraisal updates.
FINDING
Mitchell CAD does not effectively use ratio studies to measure appraisal performance and produce market-value appraisals.
Property Tax Code Section 23.01(b) states the following:
(b) The market value of property shall be determined by the application of generally accepted appraisal methods and techniques. If the appraisal district determines the appraised value of a property using mass appraisal techniques, the mass appraisal standards must comply with the Uniform Standards of Professional Appraisal Practice. The same or similar appraisal methods and techniques shall be used in appraising the same or similar kinds of property. However, each property shall be appraised based upon the individual characteristics that affect the property market value.
IAAO's Standard on Ratio Studies, Section 4.6, Evaluation and Use of Results, states the following:
A properly designed ratio study is a powerful tool for analyzing appraisal performance and suggesting strategies for improvement.
Results of the 2006 PVS show the CAD is not appraising single-family residential property at market value in Loraine and Westbrook ISDs. Single-family residential received a weighted mean ratio of 0.8990 in Loraine ISD and 0.8390 in Westbrook ISD. Single-family residential in Colorado ISD tested with a weighted mean of 0.9775. For study purposes, acceptable appraisal ratios fall between 95 percent and 105 percent of market value. Ratio study analysis is conducted before, during and after field work to evaluate appraisal uniformity and determine appraisal schedule maintenance.
The CAD conducted ratio studies for 2006 appraisal schedule maintenance and to determine appraisal uniformity by selecting sales occurring between Jan. 1 and Dec. 31, 2005. Building cost schedules are maintained by class; therefore, the CAD stratifies ratio studies by building class within each jurisdiction. Eight single-family residential sales were recorded in Loraine ISD during the period from January to December 2005. Because sales do not occur frequently in Mitchell County, the effectiveness of a ratio study with only these eight sales is questionable. In areas where sales are limited, IAAO recommends expanding the time period to capture sales that may be more representative of the overall population and to increase the sales sample for statistical calculations. Three brick homes yielded a weighted mean ratio of 0.8751, while five frame homes sold with a weighted mean ratio of 1.1074. These results are statistically unreliable because the number of observations within each class is insufficient. Of the three brick home sales, one sale occurred in Class 1, Class 1.5 and Class 2. Four of the frame home sales came from Class 2 and one came from Class 1.
Below market appraisals of single-family residential in Loraine ISD contributed to the school district's invalid finding in the 2006 PVS. Single-family residential comprise about 14 percent of Loraine ISD's total appraised value. A review of PVS results from 2004 to 2007 suggests the CAD's ratio study analysis and subsequent appraisal schedule maintenance for single-family residential in Loraine ISD has been inadequate, as evidenced by declining appraisal ratios over a three-year period.
Exhibit 1 shows a declining PVS ratio for single-family residential in Loraine ISD for the years 2004 through 2006. In terms of the category weighted mean ratio, the 2007 PVS found an improvement in appraisal level.
The CAD's current reappraisal plan states the CAD uses ratio studies to determine appraisal accuracy and uniformity. Ratio studies compare the market value of individual property in a representative sample of similar property, to the local appraised value for each property in the sample. The 2006 PVS indicates the CAD's ratio studies and appraisal maintenance do not reflect current market conditions, particularly in Loraine ISD.
The CAD's reappraisal plan states that 2008 is a reappraisal year for Loraine ISD. The CAD is on a three-year reappraisal cycle with one of the CAD's three school districts reappraised each year. According to the chief appraiser, Loraine ISD was reappraised in 2005 and Colorado ISD was reappraised in 2006. The current plan states that 2007 was a reappraisal year for Westbrook ISD.
Exhibit 2 reflects a reappraisal value increase of 41 percent in Category A, Single-Family Residential, while the number of parcels remained relatively constant, increasing less than 1 percent.
Exhibit 3 shows the 2004-07 PVS weighted mean ratios by value stratum for single-family residential in Loraine ISD and indicates a lack of appraisal uniformity between value stratums.
IAAO's Property Appraisal and Assessment Administration, Chapter 8 states appraisers should stratify ratio studies to ensure appraisal accuracy. IAAO recommends value stratification as a means to measure appraisal performance within and between property groups.
Exhibit 4 includes data from a sample Mitchell CAD neighborhood ratio study dated March 5, 2008, conducted for class 1, single-family frame residential in Colorado ISD.
Observations on the data and results of this study are as follows:
- the sample property appraisal-sale ratios range from 0.5311 to 1.87;
- the mean, weighted mean and median are 0.8865, 0.7870 and 0.7789, respectively, which are all measures of central tendency and indicate inaccurate appraisal in relation to market value;
- the CAD-computed COD is 35.71, an indication of poor uniformity of appraisal; and
- the Price-Related Differential (PRD), an indicator of vertical equity of appraisal, is 1.13, which indicates assessment regressivity, or an appraisal bias such that low-value property is appraised higher than high-value property in relation to market value; this can be due to sampling error, measurement bias or a systematic problem with the appraisal model.
In addition to the study statistics, the ratio study contains the following inconsistencies:
- in general, land class codes pertain to price per front foot of parcel lots; for example, the first lot listed is classed as a FF40 lot which has 56 front feet and is appraised at $2,240 (= 56 x $40); the fourth lot in Exhibit 4 for parcel 01000-0087-00007-000000, however, is valued as an FF30 lot instead of as it is listed at FF35;
- the ratio of land-to-appraisal values is 10 percent whereas the ratio of land-to-market value is 8 percent, which indicates underassessment of the land component versus market value;
- the first two parcels listed in the ratio study are the same property which sold twice for the same price in transactions occurring within six weeks of each other. That a willing buyer could become a willing seller in a matter of days, without financial incentive, draws into question the validity of one of the arm's-length transactions;
- the CAD does not time adjust sale price data to the valuation date for use in ratio study analysis;
- trimming one outlier ratio of 1.8756 reduces the COD to 24.20;
- the improvement in the sixth parcel in the list, number 01230-00002-00004-000010, is missing year built; in addition, three out of eight improvements from stratum 3 of single-family residential in the 2006 PVS are missing year built in CAD appraisal records – omitting year built or effective year built precludes automated calculations of depreciation in the computer-aided mass appraisal (CAMA) system;
- the actual improvement ages of the improvements ranges from 51 to 81 years, which renders the cost approach to value ineffective since it is appropriately used for newer, similar property – depreciation is difficult to estimate when improvement age goes beyond standard estimates of remaining economic life of new properties, which is usually 40 to 70 years, depending on construction class. The cost approach, therefore, may not be the most appropriate method for appraising this neighborhood in Mitchell CAD;
- the CAD appraisal model provides the most accurate results in a value range of parcels from $20,000 to $25,000 in this sample ratio study; and
- there may be more than one neighborhood in this sample study – the appraisals from GEO numbers beginning with 01070– versus 01000– are more accurate.
Exhibit 5 shows two sales of similar properties taken from Exhibit 4 in which sale dates, lot size, building area, improvement class and type, price per square foot, age and location are sufficiently similar to perform a paired sales analysis. The CAD needs to analyze all the sales information and the attributes of the individual property and determine why ratios of similar property, with similar sale dates, have strikingly dissimilar values.
To be an effective tool in measuring appraisal performance, prudent appraisal districts ensure that data contained in ratio studies is as accurate as possible. In addition, the CADs review property characteristics such as class, size, age and value. Stratifying sales information according to property characteristics is useful in ratio study analyses for identifying where mass appraisals lack uniformity within property types. These methods are useful:
- stratifying by construction class tests the accuracy of building cost schedules;
- stratifying by floor area or lot size determines how size unit values contribute to land and improvement schedules; and
- stratifying by year built determines the contribution that age makes to improvement values in the comparable sales approach and for calibrating depreciation tables in the cost approach to value.
Without meeting the Property Tax Code Section 23.01(b) requirement to use generally accepted mass appraisal standards for conducting ratio studies – specified in the IAAO's Standard on Ratio Studies (2007), Standard on Automated Valuation Models (AVMs) (2003) and USPAP's Standard 6: Mass Appraisal, Development and Reporting – Mitchell CAD's ratio studies may not be statistically reliable for the following tasks:
- calibrating land schedules by deducting the value of depreciated improvement cost new schedules on a parcel-by-parcel basis;
- testing model conclusions until improvements in the accuracy of values it produces are no longer significant;
- determining problems with uniformity/appraisal level in market areas/neighborhoods;
- prioritizing the current reappraisal plan's scope of field work;
- producing and communicating credible CAD mass appraisals; and
- achieving fair and equitable mass appraisals of real property at market value.
By identifying the potential independent variables determining value, and then using them to improve ratio study results, Mitchell CAD can ensure accurate adjustments to its mass appraisal model and appraise at, or near, market value.
After reviewing the draft report, the CAD stated that it will change its procedures to expand the time period from which sales are drawn to improve sample representativeness and increase sample size for use in stratified ratio studies. The CAD also stated that, during its fieldwork, it will verify appraisal data to correct inaccuracies and include previously omitted property characteristics.
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 1
Improve the effectiveness of internal ratio study analysis of sale price data by stratifying property characteristics that determine value, apply those conclusions to the automated valuation model and evaluate the CAD's mass appraisal performance in appraising local value at market value.
Methods for improving internal ratio study analysis should include paired sales analysis and sale price sample stratification by property characteristics such as the following:
- location
- class
- condition
- size
- effective age
- year built
- percent good
- value
FINDING
Mitchell CAD's method of determining productivity values for qualified acreage produces inconsistent results.
Property Tax Code Section 23.41(a) states the following, in pertinent part:
(a) Land designated for agricultural use is appraised at its value based on the land's capacity to produce agricultural products. The value of land based on its capacity to produce agricultural products is determined by capitalizing the average net income the land would have yielded under prudent management from production of agricultural products during the five years preceding the current year.
Property Tax Code Section 23.51(4) explains how to calculate net to land and states the following:
"Net to land" means the average annual net income derived from the use of open-space land that would have been earned from the land during the five-year period preceding the year before the appraisal by an owner using ordinary prudence in the management of the land and the farm crops or livestock produced or supported on the land and, in addition, any income received from hunting or recreational leases. The chief appraiser shall calculate net to land by considering the income that would be due to the owner of the land under cash lease, share lease, or whatever lease arrangement is typical in that area for that category of land, and all expenses directly attributable to the agricultural use of the land by the owner shall be subtracted from this owner income and the results shall be used in income capitalization. In calculating net to land, a reasonable deduction shall be made for any depletion that occurs of underground water used in the agricultural operation.
Prior to 2008, the CAD's contract appraiser calculated productivity values. The chief appraiser stated the contractor was given copies of Farm and Ranch Surveys completed by the CAD's agricultural advisory board, as well as copies of surveys obtained from local agencies such as the Farm Service Agency and the Agricultural Extension Office. PTAD annually mails Farm and Ranch Surveys to appraisal districts, agricultural advisory boards and other county agencies to obtain local agricultural income and expense information for determining productivity values. Using data from the surveys, PTAD calculates productivity values for each reported class of agricultural land within each appraisal district. PTAD's results are weighed against the values reported by each appraisal district and the resulting ratios are included in the PVS.
Exhibit 6 shows the results of the 2006 PVS productivity values for Mitchell CAD.
Native pasture is the largest land class and represents 63.7 percent of all qualified acres. The resulting 0.6243 ratio for native pasture productivity values negatively impacts the entire category of qualified acres, resulting in an overall ratio of 0.8598 for productivity values. Irrigated crop represents less than 1 percent of qualified acres, but the difference in local and PTAD values is contributing to the category's low ratio.
PTAD staff stated the primary difference between the Comptroller's estimate of native pasture productivity and the CAD's estimate is the income associated with hunting leases. In analyzing the net-to-land for the five years prior to 2006, PTAD concluded $3 per acre to be typical, prudent hunting lease income, while the CAD used $1 per acre. The $2 difference capitalized at 10 percent yields $20 per acre higher and accounts for PTAD's estimate of $48.90 per acre. The chief appraiser stated the agricultural advisory board does the best it can to obtain the most current agricultural income and expense information, but since not all native pasture is leased for hunting, sometimes the data is difficult to obtain.
In 2006, the CAD did not perform net-to-land calculations for irrigated crops as required by Property Tax Code Section 23.51(4). According to the chief appraiser, only a small amount of acreage is devoted to irrigated crops and the income and expense information has been limited. In 2006, the CAD based the productivity value of irrigated cropland on an estimated lease rate of $23.51 per acre and adjusted for estimated management expenses and taxes. The CAD's contract appraiser used lease information from surrounding counties. Property Tax Code Section 23.51 requires that net-to-land calculations be computed from a five-year moving average, not current, single-year estimates.
By not gathering historical prices for calculating all land productivity values, Mitchell CAD does not comply with statutory guidelines for calculating net-to-land, which partially contributed to the 2006 PVS finding of Loraine ISD's local value to be invalid.
If the CAD fails to improve its methods for calculating productivity values, unequal levels of appraisals will continue among qualified land classes.
Results of the 2007 PVS show the CAD continues to have problems estimating productivity values, with an overall Subcategory D1 ratio of 0.7573, down from the 2006 ratio of 0.8598. Colorado and Loraine ISDs received invalid findings as a result. The chief appraiser stated the CAD has contacted an agricultural expert to assist with obtaining reliable income and expense data and with calculating productivity values for 2008.
The CAD noted in its review of the report draft that it has contracted with an agricultural appraisal expert to assist in developing an in-house agricultural appraisal manual. According to the chief appraiser, in future tax years, the contractor will assist in updating the 2008 agricultural appraisal information, which the CAD submitted with its response to the draft review.
RECOMMENDATION 2
Improve methods for obtaining data for calculating productivity values.
FINDING
Mitchell CAD does not have written procedures for analyzing and adjusting sales.
IAAO's Standard on Ratio Studies (2007), Section 6.4 Screening Sales, discusses the importance of analyzing and adjusting sales and states:
To help analysts make wise and uniform judgments, screening procedures should be in writing, and each sales analyst should be thoroughly familiar with these procedures as well as underlying real estate principles.
The CAD's deed clerk routinely mails sales surveys to buyers for all recorded deed transactions. The surveys request information such as the sale date, sale price, type of improvement or personal property included in the sale, type and terms of financing and if the purchase was between relatives. When the CAD receives responses to the sales surveys, the chief appraiser and deputy chief appraiser review the information provided to determine if a sale needs adjusting and meets the requirements of a market transaction. The chief appraiser estimates the CAD mails about 600 sales surveys annually, with a response rate of about 10 percent. Other sources of sales information comes from Realtors and fee appraisers. The CAD makes its sales information available to the Comptroller.
In areas where sales are scarce or difficult to verify, IAAO suggests expanding the time period for which sales are analyzed, but cautions that older sales must be adjusted for time to ensure consistent results. During the period from Jan. 1 through Dec. 31, 2005, the CAD recorded eight single-family residential sales in Loraine ISD. Three brick houses and five frame houses made up the sample consisting of class 1 and 2 homes. By expanding the time frame to include sales occurring before January 2005 and after December 2005, the CAD may have been able to obtain a more representative sample of single-family residential sales in Loraine ISD. The CAD lacks procedures for time adjustments.
According to the chief appraiser, she and the deputy chief appraiser analyze sales to determine if they are arms-length transactions and if they need to adjust them. The CAD does not have written guidelines for analyzing and adjusting sales. It instead relies on each appraiser's knowledge and experience. The chief appraiser has more than 20 years of appraisal experience and the deputy chief appraiser has been with the CAD since 1995. The chief appraiser noted IAAO's textbook Property Appraisal and Assessment Administration serves as a guide for analyzing and adjusting sales. The CAD regularly inspects sales to determine if its records accurately reflect the property's characteristics. According to the chief appraiser, the CAD uses sales during the appeals process to help support the CAD's appraised values and to produce ratio studies to measure appraisal performance and conduct appraisal schedule maintenance. The Mitchell County Appraisal District General Appraisal Manual states sales are analyzed to determine market trends, but instructions for performing the analysis are not provided.
According to IAAO, examples of non-market sales include the following:
- involve government entities and public utilities;
- involve charitable, religious or educational institutions;
- involve financial institutions;
- are between relatives or corporate affiliates;
- are of convenience;
- are settling an estate;
- are forced; and
- are of doubtful title.
IAAO requires appraisers to analyze sales to determine if they need to adjust them for personal property, financing, assumed leases and time. Appraisers need to document procedures for adjusting sales and support them with market data.
Without common guidelines for determining how to verify, confirm and adjust sales, the CAD risks using sales for appraisal maintenance that do not accurately reflect current market value. Confirmation and validation of sales is critical in determining local market values, particularly among single-family residential. Loraine ISD received an invalid finding in the 2006 PVS, primarily because single-family residential tested below market value. Single-family residential received a weighted mean ratio of 0.8990.
Written guidelines help appraisers in selecting and adjusting sales for assigning values and as evidence before the appraisal review board. 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 accuracy. By providing comprehensive, written guidance to appraisal staff, Mitchell CAD can help assure that appraisers apply sales data consistently and use valid samples in internal ratio studies for estimating market value.
The chief appraiser responded to this finding by reiterating the following:
- Mitchell CAD has a sales data gathering and verification program;
- she believes that lack of written procedures has not hindered the gathering process or amount of data recorded in the CAD's sales file; and
- there are very few sales in Mitchell County.
The finding notes the chief appraiser's estimate that the CAD mails about 600 sales surveys annually to buyers due to all recorded deed transactions with a response rate of about 10 percent. There were 2,894 single-family residential parcels in the county according to the CAD's 2007 certified roll. PTAD used 70 sales in the field studies sample for Mitchell CAD in single-family residential in the 2007 PVS, and 63 in 2006. The CAD's ratio studies, with the range of sale dates from January 2007 to December 2007, included 221 sale transactions that were collected from several property categories. The validity of each sale is unknown and none of the sale prices were time-adjusted to the appraisal date. Chapter 7 of the IAAO's Assessment Practices: Self-Evaluation Guide states CADs can use techniques for developing sales comparison models with even a small number of sales. For example, 250 sales during a three-year period may be sufficient.
The CAD stated it will develop written procedures for the sales gathering and verification process, including sales screening, confirmation, time adjustments and ratio study analysis, to use in updating land and improvement cost schedules.
For example, Nueces CAD has a well-written market analysis procedures manual that describes the process used to obtain valid sale price data by also including procedures necessary for confirming sales. These written procedures assure the data collection staff performs market analyses consistently accurately, no matter if there are changes in personnel.
RECOMMENDATION 3
Develop procedures for gathering and analyzing valid sale price data and, when indicated, how to time adjust sale price data to the assessment date.
FINDING
Mitchell CAD's appraisal manuals are not locally developed and omit the directives necessary for performing the appraisal assignments.
IAAO's textbook, Property Appraisal and Assessment Administration, Chapter 1, The Ad Valorem Tax System, describes the importance of written procedures or standards of practice and states they may incorporate or be contained in laws, regulations, policy memoranda, procedural manuals and guidelines, appraisal manuals and schedules. Repeated tasks, particularly those done by more than one person, should be described in guidelines or manuals. There should be a procedure for establishing standards of practice, including regularly updating manuals. Procedures are required for monitoring the quality of appraisals, editing data and reviewing appraisals.
The onsite reviewer examined 13 sample properties from Loraine ISD's 2006 PVS. The reviewer audited eight single-family residential and five non-qualified acreage accounts. The reviewer conducted onsite visits to the property and appraised them using the CAD's appraisal manuals. The manuals contain improvement classification guides, photographs, building cost schedules, land tables and depreciation tables.
Accompanied by the chief appraiser, the reviewer inspected each property. The reviewer examined information pertaining to property characteristics contained on the CAD's appraisal cards for accuracy and he reviewed the reasonableness of the CAD's data for age, condition and size. Using descriptions of property classifications found in the CAD's appraisal manuals, the reviewer classed each property based on type and quality.
Residential property was classified as either frame or masonry with quality ratings from one to seven, one being lowest quality and seven being the highest quality. Using the CAD's calculated square footages for each building component, such as living area, porches and garages, the reviewer applied the corresponding costs per square foot from an outside firm's appraisal manual and calculated a replacement cost new. For example, a frame class 1 house in Loraine ISD with 1,421 square feet of living area has a base cost per square foot of $36.72. The reviewer estimated the effective age of the improvement and used the CAD's depreciation table to determine a percent good factor, which was factored in to the replacement cost new to estimate the current value of the improvements.
To value land, the appropriate unit value for the land code on the appraisal card was applied from the CAD's land schedule. For example, if the property contained the land code FF5, the land was appraised at $5 per front foot, the front foot unit cost from land table FF5. The reviewer combined the improvement and land values to arrive at the total property value.
The results of the review of a sample of appraisal cards did not contain material differences between the reviewer's estimates using the CAD's proxy manuals from an outside appraiser and the CAD's values. Due to the reviewer's appraisal experience, he was able to use the CAD's proxy appraisal manuals, despite a lack of written instructions for performing the appraisals. The fact that the reviewer was able to replicate the CAD's values does not suggest that they are current market value as of the appraisal date; it simply means that the contract appraisers' manual included the steps for mass appraisals typically used in Mitchell CAD.
Prior to 2008, the CAD used contract firms to appraise all improved and vacant real property. Through fieldwork with data cards generated by the CAD for all property included in the current year's reappraisal, contract appraisers gathered specific data, such as the improvement condition, age, construction details and physical measurements. In addition to improvement data, the external firm's appraisers collected data for the land component of real property parcels, including lot size, shape and parcel situs. Similar data was gathered for vacant lots and tracts, as well as rural acreage. Procedures for applying the CAD's appraisal model to the field data for producing an appraised value, however, are lacking. In 2008, the chief and deputy chief appraisers are to perform the reappraisal field work with the same methodology.
The appraisers record the accumulated property characteristics on appraisal cards and sketch improvements. Using appraisal manuals developed by the contractor based on their appraisal knowledge, the external appraisers determine the property type and class, unit costs and depreciation. Data gathered in the field is given to CAD staff to enter into the CAD's automated valuation model (AVM). Separate values for land and improvements are calculated. When the field data is applied in the CAD's automated valuation model, the appraisal model results are an estimate of market value for each property based on its individual characteristics. The chief appraiser and deputy chief appraiser evaluate the accuracy of the results of the updated field data by reviewing the appraisal record cards. Prior to 2008, when questions arose as to the accuracy of the data, the chief appraiser contacted the contractor for an explanation.
Residential property is appraised using cost schedules developed by the former contract appraiser. The outsourced residential appraisal manual includes the following:
- current residential building schedules;
- a depreciation table;
- descriptions of typical classification characteristics for residential building classes one through seven;
- descriptions of building appurtenance codes, such as flooring, interior finishes and heating and air conditioning; and
- representative pictures for each residential class.
Although the chief appraiser indicated the manual was last updated in 2006, it does not have detailed instructions for use in appraisal assignments. Without locally-developed appraisal manuals that include directives specifically addressing topics that include, but are not limited to:
- improvement measurement and sketching;
- classification of local realty and identification of the characteristics that determine its value;
- calculation and the use of appraisers' judgment in applying depreciation tables for improvements based on age and condition factors like year built, effective age, percent good, etc.; and
- local site valuation methods for land appraisals used in conjunction with highest and best use, market analysis, delineating boundaries of districts, neighborhoods, sub areas and for open-land appraisals.
The outsourced appraisal manual has not been an effective training tool nor provided a set of directives through which field appraisers attain the CAD's goal of statistically reliable, fair and uniform mass appraisals.
The appraisal cards of single-family residential in Loraine ISD included a 0.77 economic depreciation factor. At the time of the onsite review, the chief appraiser stated the contract appraiser had not explained how he determined the economic depreciation factor. Nonetheless, Property Tax Code Section 23.011, Cost Method of Appraisal states, in pertinent part, that if the chief appraiser uses the cost approach to appraise the market value of real property, which is what Mitchell CAD primarily uses to appraise single-family residential, the chief appraiser is responsible for the following:
(2) [making] any appropriate adjustment for physical, functional, or economic obsolescence;
(5) [making] available to the property owner on request all applicable market data that demonstrate the difference between the replacement cost of the improvements to the property and the depreciated value of the improvements.
Fifty-five percent of the 31 residential properties sampled in the 2006 PVS had ratios below 0.95. The 0.77 economic depreciation factor, which was not supported by market data, reduced the replacement cost new of improvements about 23 percent. Further, the PVS weighted-mean ratio for Category A, Single-Family Residential, indicates the need to calibrate the depreciation factor used for quantifying the value difference between the replacement cost of the improvements and market value as of the date of appraisal. USPAP states that the value difference may emanate from physical deterioration, functional obsolescence, external obsolescence or any combination of these. IAAO requires that economic depreciation must be recognized if external factors such as the economy or environment are negatively influencing property values. The CAD provided no evidence supporting reduced values due to economic depreciation or environmental issues. Inaccurately appraised single-family residential in Loraine ISD contributed to the 2006 PVS finding that local value was invalid; but was certified because the school district was eligible for year one of the grace period.
The CAD uses market data in land valuations. Size, parcel situs and use are factors affecting land values. The CAD values land by the acre, square foot, front foot or flat-valued lots based on the factors. Land schedules were updated in 2006. The appraisal manual has numerous schedules based on square footage, front footage and acreage, but omits directives for when and which appraisal method to use.
The chief appraiser stated the CAD is in the process of converting all commercial cost schedules to schedules found in the Marshall and Swift Commercial Valuation Guide. The commercial schedules are adjusted by the building cost modifier published by Marshall & Swift for the Abilene area. The modifier ranges from 0.86 to 0.88 depending on construction type. The CAD lacks local market data to develop and calibrate local commercial cost modifiers. In 2006, Category F1: Commercial Real accounted for 1.74 percent of the CAD's total appraised value and less than 1 percent of Loraine ISD's total appraised value. The chief appraiser stated all commercial appraisals will be based on the Marshall & Swift guide in 2009. Updates to the Marshall and Swift Commercial Valuation Guide are received quarterly. The CAD lacks documentation of local procedures with detailed directives for using commercial schedules when performing appraisals.
In 2006, Mitchell CAD's business personal property accounts made up less than 1 percent of the CAD's total reported appraised value. The chief appraiser and deputy chief appraiser work the personal property accounts. According to the chief appraiser, personal property values are reviewed every year by examining renditions filed by business owners and she estimates 95 percent of all commercial entities in Mitchell CAD render business personal property. Individual staff members review renditions for accuracy and reasonableness while relying on personal appraisal knowledge and experience which, when the chief and deputy chief appraisers' are summed together, equal 33 years of collective appraisal experience. Notwithstanding the significant experience of individual appraisal staff, the CAD could lose institutional knowledge by not documenting or failing to develop a manual to guide future personal property appraisal review and evaluation of renditions. To appraise the personal property not rendered, the CAD compares values from similar business renditions. It then depreciates the property using a schedule based on industry-standard estimates of the economic life of various classes of business personal property. Until a comprehensive personal property appraisal manual with instructions is developed locally, however, Mitchell CAD may lack the guidance a process map provides for effective discovery, appraisal and evaluation of personal property renditions.
Mitchell CAD staff, taxing constituents and property owners benefit from written procedures for appraisal process steps and the directives for proper use of them.
With CAD staff assuming more appraisal responsibilities, the lack of detailed appraisal procedures manuals may affect consistent appraisals or have unintended results, such as a variance in property values from market value. A variance from market value could result in a finding of invalid local school district values in Mitchell CAD by the state's equalization ratio study. If the level of appraisal (percentage of market value) varies between or among property categories, or from parcel to parcel within a property category, one property owner's share of the local tax burden may not be as fair or equitable as the others. Effective instructions for use of the CAD's appraisal manuals will aid accurate and uniform appraisal performance, foster transparency of CAD operations and help taxpayers and other laypersons understand the local CAD's appraisal operations.
A comprehensive appraisal procedures manual will likewise help ensure the CAD complies with statutory standards and requirements, for example:
- developing an appraisal model that reflects the relationship among the property characteristics affecting value in each market area and determines the contribution of individual property characteristics (as in appropriately adjusting for physical obsolescence);
- ensuring appraisal uniformity among strata, or determining reappraisal priorities);
- appraising the market value of property by applying generally accepted appraisal methods and techniques;
- complying with the mass appraisal standards promulgated by the Uniform Standards of Professional Appraisal Practice when a CAD uses mass appraisal standards to appraise property value;
- using the same or similar appraisal methods and techniques in appraising the same or similar kinds of property; and
- basing each property appraisal on the individual characteristics that affect the property's market value.
Upon review of this finding, the chief appraiser stated that appraisal manuals from previous contractors will be updated to include current procedures and local data.
Fort Bend CAD, for example, developed a comprehensive appraisal manual for CAD staff. In addition, the CAD has an excellent training process for new employees and developed written processes to ensure accurate information is gathered and entered into CAD appraisal records. The manual addresses procedures and classification details for staff to follow. In addition, the CAD provides excellent continuing education and initial training for new employees.
RECOMMENDATION 4
Develop local appraisal manuals that include the process, procedures and directives necessary for performing real and personal property appraisals.
2.3
Other Recommendation
During the course of the review process, PTAD identified a certain management and operational issue that may not be directly related to the appraisal process, but could indirectly affect the CAD's ability to conduct appraisals accurately and consistently. Mitchell CAD is not obligated to implement this recommendation, but it is provided here for consideration as additional ways to enhance operational effectiveness and efficiency. This recommendation, however, may advise compliance with existing laws. Appraisal districts, as Texas governmental entities, are required to comply with all applicable laws.
FINDING
Mitchell CAD lacks written procedures for monitoring contracts.
The IAAO's Standard on Contracting for Assessment Services, Section 5, Monitoring Contract Performance, states contracts must be monitored continually to ensure that all completed items meet required standards.
Prior to 2008, the CAD contracted for appraisal services with two separate appraisal firms. In August 2004, the CAD contracted for the appraisal of all local real property–land and improvements – for the 2005-07 tax years. The contract included the following:
- field inspections of all properties identified by the CAD requiring new appraisals or reappraisals;
- development of improvement cost and land schedules;
- development of productivity value schedules; and
- defense of values at appraisal review board hearings.
The total annual cost of the contract was $18,850. The chief appraiser indicated that, when the contract ended Dec. 31, 2007, the appraisal firm did not seek to renew the contract due to realignment of its appraisal service offerings, which it limited to single-property appraisal, and thus withdrew from the mass appraisal marketplace. The Mitchell CAD board of directors is undecided if it will seek to replace this service contract for local appraisals.
In December 2005, the CAD entered into a two-year contract with another outside firm to appraise local mineral, utility and industrial property. The contract required the CAD to annually pay the outside appraisal firm $52,000 for appraising technical and complex property in the 2006-07 tax years.
The chief appraiser stated she is responsible for contract monitoring and approving payment for services rendered. The CAD does not have documented monitoring procedures or guidelines for contract administration.
According to the findings of the Comptroller's property value ratio study, the external appraisal firms inaccurately appraised several categories of property tested in 2006. In one of the contracted appraisal assignments, the results of productivity values developed by the external firm showed wide variances from the Comptroller's appraisal of open-space land. The standard for determining land values in special ag appraisals is not market value; instead, qualified open-land appraisals use a statutory method to determine the land's productivity value, which is best defined in the Comptroller's Guidelines for the Appraisal of Agricultural Land. A statutory ag appraisal must develop productivity values by gathering data from a number of sources, some of which include, but are not limited to the following:
- receiving advice from a board-appointed agricultural advisory board;
- taking a census of crop yields;
- direct mail mass surveys of landowners' income and expense data, which is directly related to the cost of agricultural production or the typical open-land lease rates in the area;
- collection and comparative analysis of agricultural cost and income data from surrounding counties to assess the reasonableness and accuracy of the results;
- using state- and government-sponsored farm bureaus, agricultural agencies and farm lending institutions as sources of data on agricultural production and technical expertise.
In 2006, the PVS found poor uniformity and below-market value appraisals in Category J, Utilities, appraisal in Colorado ISD. The values of the contract appraisal firms did not meet the standard required by Property Tax Code Section 23.01, which states that all property appraisals must be at market value.
Exhibit 7 shows the results of the 2006 PVS for every property category tested by school district:
For purposes of the PVS, the acceptable range of weighted mean ratios is 0.95 - 1.05. In 2006, eight of 14 category ratios, or 57 percent, fell outside the acceptable appraisal range. Loraine ISD received an invalid finding as a result of poor appraisal performance in 2006.
Unless specified elsewhere in the contract, the chief appraiser is responsible for acceptance of all goods, services and deliverables under CAD contracts. The same laws, statutes, standards and requirements that apply to chief appraiser under the Property Tax Code, also apply to a CAD contractor, who must likewise comply with the Property Tax Code as the chief appraiser's agent. If Mitchell CAD permits contractors to underperform and not meet all, or only some, of the generally accepted and legally mandated mass appraisal standards, the resulting appraisal performance will not be equitable and uniform, and unexpected levels of school funding may be a consequence.
After reviewing the report draft, comments submitted by the chief appraiser stated that, "Rest assured, Mitchell CAD monitors all of its contracts and will document the contract monitoring procedures it uses in the future to comply with the Comptroller's recommendation." PTAD requested a copy of the CAD's service contract with an agricultural appraisal expert for assistance in developing an in-house agricultural appraisal manual that the chief appraiser cited in the CAD response to an earlier finding. The CAD forwarded a Contract for Consultation Services entered into on Dec. 27, 2007, with a consultant to perform the services listed in Exhibit 8 to assist the Mitchell CAD chief appraiser in establishing agricultural values for the 2008 tax year.
Since the services in the ag appraisal contract in Exhibit 8 should follow a critical path – each procedure should follow, and be supported by, the data from the output resulting from the previous step – the completion and delivery dates of service deliverables must be specified to enable the CAD's contract monitor to identify and measure variances impacting the timely performance of each service in the process. Without delivery dates, a buyer cannot establish late delivery or failure to make progress, if necessary, as a basis for terminating a contract for cause or default.
Despite CAD assurances and Property Tax Code Section 25.19 directing the delivery of written notice from the chief appraiser to a property owner of an annual property appraisal increase by May 15 or as soon thereafter as practicable, Mitchell CAD's contract for special ag appraisals does not mitigate the CAD's risk since most of the service deliverables cannot be functionally monitored for delivery date.
Hansford CAD, for instance, successfully prepares, manages and monitors its contracts while meeting IAAO contracting standards. Hansford CAD's deputy chief appraiser supervises the appraisal services contract to ensure that all requirements are being met and the chief appraiser supervises other contracts.
RECOMMENDATION 5
Develop written guidelines for monitoring professional service contracts.