Findings of the Appraisal Standards Review
This chapter of the report addresses findings, commendations and recommendations from the appraisal standards review of the Palo Pinto CAD in two sections:
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 each 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 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 for appraising mineral and utility properties.
Palo Pinto CAD has designated one position solely for personal property appraisal, which contributes to its achievement of consistent and acceptable market value in the PVS for Category L.
Property Tax Code Section 22.01 requires a person to render for taxation all tangible personal property used for the production of income that the person owns or manages and controls as a fiduciary on January 1.
Property Tax Code Section 22.07 also gives the chief appraiser or a designated representative permission to enter the premises of a business, trade or profession and to 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 appraisal district. "Situs" is the location of property that determines what agency has taxing jurisdiction over it.
Historically, Palo Pinto CAD achieved acceptable values in the personal property category. The CAD has one full-time appraiser whose sole responsibility is inspecting, analyzing renditions and performing appraisals of all personal property within the appraisal district. The current employee has been in this position for three years. Given the parcel count in the CAD, the decision by the board to create this position has helped this category to remain within the confidence level in the PVS.
IAAO's Standard on the Valuation of Personal Property requires an audit program to verify that all reported personal property items, such as personal property returns and reports, and the information given is accurate. The Palo Pinto CAD appraiser inspects personal property on the tax rolls annually, and the CAD has a comprehensive manual that includes provisions for physically inspecting all business personal property accounts as well as procedures for appraisals.
The appraiser researches new properties not only through a physical inspection, but also through the phone book, advertisements, billboards and county and state records. The CAD mails rendition forms to business owners annually and uses their reported values and CAD schedules to appraise business personal property.
If the CAD does not receive a rendition, the personal property appraiser contacts non-rendering business owners and encourages them to render their property.
Palo Pinto CAD has one employee responsible solely for appraising personal property, which results in the category consistently remaining within the PVS confidence level.
Palo Pinto CAD initiated a process that incorporates updated technology for documenting sales.
The CAD employs two individuals to research and update recent deed transfers in the county. The deed supervisor stated that parcel splits and combinations are noted on the mapping system within two months of being recorded. The process involves obtaining deed transfer information via a monthly CD from the county clerk's office for all deeds recorded in the previous month. The average number of deed transfers, excluding oil and gas, on the CD averages 350-400 per month.
The deed supervisor views the deed information and extracts pertinent data that is put into an Excel spreadsheet. During the onsite visit, the chief appraiser said the CAD was in the process of streamlining the process, to transfer data into the appraisal software system electronically.
After this step, the deed clerk reviews each deed and updates the appraisal system to reflect the new owner. At the same time, deeds are submitted to the mapping department to plot on a mapping system purchased in 2004. The information is plotted in the GIS and a parcel number is assigned (if a new one is required), which completes the update.
Finally, the mapping coordinator submits the completed split deed to the CAD's Deed Department, where information is scanned into the appraisal software and attached to the appropriate account numbers, with the deed supervisor approving all changes.
Each parcel is assigned a specific parcel number in the software system, which does not allow for duplication.
Remaining current in technology and using it expedites the incorporation of new sales information into the appraisal software.
The CAD developed an excellent process for handling deed transfers that helps keep the appraisal system information current.
Palo Pinto CAD lacks a comprehensive reappraisal plan.
As of Sept. 15, 2006, each appraisal office is required by Property Tax Code Sections 605(i) and 25.18(b) to implement a plan for periodic reappraisals of property that is approved by the board of directors.
Property Tax Code Section 25.18(b) states that:
(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 property 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 chief appraiser reported that Palo Pinto CAD developed a reappraisal plan that received board approval on Sept. 9, 2006. The reappraisal plan was filed with PTD in a timely fashion.
The 22-page document identifies the CAD's policy statement, Property Tax Code requirements and a summary of Standard 6 of Uniform Standards of Professional Appraisal Practice, and offers two pages describing real and personal property valuation.
Although the plan identifies areas to appraise, it does not clearly address Property Tax Code Section 25.18 (b)(5), which requires the CAD to develop an appraisal model that reflects the relationship among property characteristics affecting value in each market area, and to discuss this methodology in the reappraisal plan. Areas are defined in the reappraisal plan, not by specific property type, but by ISD instead. Because the plan does not clearly address Property Tax Code Section 25.18(b)(5), compliance, with subsections (6) and (7) on applying conclusions and reviewing results, is unlikely.
The chief appraiser also provided a two-page work plan and calendar from 2002 through 2009 that outlines the areas to be reappraised, by school district, and provides instructions on "rechecks" (new properties, splits, new construction, building permits and new subdivision development). A comprehensive calendar outlines the requirements and goals set by month. The work plan identifies the school district, neighborhood and assigned appraiser. Properties are analyzed by property type, location and size, except for Possum Kingdom, which is analyzed by street. The chief appraiser indicated that the CAD is on a two-year plan for reappraising all property in the county. Every property is inspected every other year.
The CAD's work plan is a beneficial component of a reappraisal plan, but the current reappraisal document falls short of USPAP and Property Tax Code requirements. Lack of a comprehensive reappraisal plan can cause reappraisal efforts to be incomplete and result in property values deviating from market value, as identified by the 2005 PVS for Category D in Mineral Wells ISD. Furthermore, a preliminary 2006 report for Santo ISD indicates the CAD is outside the confidence interval in Category A and Category D3. This market value deviation can result in a school district falling outside the confidence interval and receiving an invalid finding in the state's property value study.
If a school district continues to receive invalid findings, it can lose state funds in the school funding formula. A comprehensive reappraisal plan should provide for the reappraisal of all real property in each district at least once every three years, and offer a blueprint for performing the work and a training tool that encourages consistency in staff appraisals.
A reappraisal plan is the primary written document guiding staff in performing appraisals. A written plan provides consistent direction to staff performing appraisals and increases the likelihood of reliable and accurate appraisals.
According to USPAP Standard 6, a functional reappraisal plan includes the following activities:
- identifying properties to be appraised;
- identifying and updating in the appraisal records the relevant characteristics of each property to be appraised;
- defining market areas;
- identifying property characteristics that affect property value in each market area;
- developing an appraisal model that reflects the relationship among the property characteristics affecting value in each market area;
- calibrating the model to determine the contribution of the individual property characteristics affecting value;
- applying the conclusions reflected in the model to the characteristics of the properties being appraised; and
- reviewing the appraisal results.
USPAP Standards Rule 6-2(g) requires appraisers to "identify the characteristics of the properties that are relevant to the type and definition of value 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 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.
A reappraisal plan also should provide for a physical inspection of the properties being appraised, although it can also rely on credible sources of property information such as deeds, building permits or other legal documentation, aerial photographs, land-based photographs, surveys, maps and property sketches. A complete plan will indicate instances or types of properties that can be appraised using sources of information other than physical inspection.
A thorough reappraisal plan details how and when the appraisal district plans to perform each of the activities mentioned above. A reappraisal plan, if executed properly, ensures that values in each school district are valid in the PVS, thereby ensuring that school districts all get the state funding to which they are entitled. A comprehensive and properly executed plan also ensures uniform and fair treatment of property taxpayers.
For example, Nueces CAD has comprehensive 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 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 appraisal district uses sales in reappraising property and how it uses the internal ratio study to determine the need for reappraisals in each market area.
Adopt and implement a comprehensive, written biennial reappraisal plan in compliance with Property Tax Code Section 25.18(b) and USPAP Standard 6.
At the time of the on-site review, Palo Pinto CAD's appraisal manual was outdated and lacked comprehensive procedures for appraising commercial and rural property.
At the time of the on-site review, the appraisal manual had comprehensive procedures for valuing residential properties, but relied on out-of-date, in-house, cost-based schedules in addition to sales. For example, the depreciation schedule in the residential cost section was dated 1996. The last update for mobile home class description was 1995. The Property Classification Guide referenced as part of the manual was dated 2001. The appraisal manual included class descriptions with comprehensive descriptions for a wide variety of residential properties.
Since the on-site visit, Palo Pinto CAD has updated some areas of its appraisal manual. The updates included all tables, schedules and classifications for residential properties. Cost schedules, tables and classifications for commercial properties, however, have not been updated.
The CAD relies on Marshall Valuation Service as a benchmark for all residential classifications. This manual is widely used by mass and fee appraisers, and includes comprehensive procedures for identifying property attributes, charts for various property characteristics and an associated cost schedule for all houses, calculated as a price per square foot.
Property Tax Code Section 23.01(b) requires appraisal districts to appraise property using generally accepted appraisal methods and techniques. It also requires appraisal districts to comply with the USPAP and to apply consistent appraisal methods and techniques to the same or similar properties, while taking into account individual property characteristics.
The appraisal manual has no procedures for performing sales comparisons for residential or commercial properties and land (whether rural or commercial), and lacks procedures for the income capitalization approach. By relying on the cost approach for commercial properties, the CAD is placing itself at a disadvantage if a property owner ever challenges its derivation of property value.
Current and updated appraisal manuals offer guidelines to assist appraisers with uniformity and consistency of value of properties. These are an important tool for valuation, and vital for consistency when more than one individual is valuing property.
The absence of clear guidelines for Palo Pinto CAD field appraisers contributes to the inconsistencies identified in the PVS. By revising the appraisal manual, the CAD can help ensure consistent appraisals of all categories of property and create a valuable training tool for inexperienced staff members.
Nueces CAD, for example, has well-written policies and procedures manuals that address residential, commercial and land appraisal procedures. The procedures include staff responsibilities, valuation methods, market analysis procedures and guidelines for open-space valuations. The CAD's Commercial Procedures Manual discusses when and how to use the three approaches (cost, market and income) to value commercial properties. It also contains a classification guide showing pictures of various types of commercial buildings, to assist the commercial appraiser in classifying properties in a uniform and consistent manner. The CAD's Personal Property Procedures Manual includes job descriptions and assignments, an outline of the discovery process and valuation schedules.
Maintain updates of the appraisal manual for use in valuing residential and commercial properties and rural land.
Though Palo Pinto CAD runs ratio studies, it does not routinely analyze the results to support appraisal accuracy.
A ratio study examines the relationship between appraised or assessed values and market values. Indicators of market values may be sales or independent appraisals. Without ratio studies, appraisal districts cannot pinpoint what is contributing to inaccurate appraised values in the CAD.
Appraisal districts use ratio studies to plan appraisal maintenance programs. Ratio study results indicate areas where appraised values do not reflect market indications of value. As such, the appraisal district can use available sales to pinpoint variances and correct any misalignment, so appraised values more accurately reflect market value. Third parties also can use ratio studies to determine the CAD's appraisal performance.
Although the chief appraiser provided information showing sales in certain neighborhoods, no internal information on the analysis of ratio study results was available.
The 2005 PVS reveals that the CAD was outside the confidence level for Mineral Wells ISD in Category D3. Although the chief appraiser and senior appraiser attributed this to one sale, the study presented on the Comptroller's Web site identifies 24 sales in the D3 strata. The overall ratio was 0.8615 in this category, outside the acceptable 5 percent margin of error.
Exhibit 6 presents the local stratum value (CAD), the PVS stratum value and the (relationship) ratio for Mineral Wells ISD.
Stratified Ratio Detail Mineral Wells ISD
|ISD||Category/Stratum||Local Stratum Value||PVS Stratum Value||
Source: Texas Comptroller of Public Accounts, 2005 Property Value Study Final Findings, June 2006.
The CAD may have been able to avoid some of the invalid findings in the 2005 study if it had comprehensive procedures for analyzing ratio study results in each category and had been making schedule changes accordingly. Using the appropriate valuation technique(s) significantly increases the chances for a more reliable result. Routinely examining sales in a category shows the CAD where it may be falling short in property valuation. As such, Santo ISD could have been prevented from falling outside the confidence level during the preliminary findings for 2006. Exhibit 7 presents the local stratum value (CAD), the PVS stratum value and the ratio between the two for Santo ISD.
Stratified Ratio Detail Santo ISD
2006 PVS (Preliminary)
|ISD||Category/Stratum||Local Stratum Value||PVS Stratum Value||
Source: Texas Comptroller of Public Accounts, 2006 Property Value Study Preliminary Findings, June 2006.
Category A includes single-family residences and was undervalued by approximately 23 percent in the sample studied.
According to the IAAO Standard on Ratio Studies, ratio studies provide a means for testing and evaluating mass appraisal valuation models to ensure that value estimates meet attainable standards of accuracy. Local uses include the following, according to IAAO's Standard on Ratio Studies, Section 2.3:
- measurement and evaluation of the level and uniformity of mass appraisal models;
- level measurements provide data about the degree to which goals or requirements are met; and
- uniformity refers to the degree to which different properties are appraised at equal percentages of market value.
- internal quality assurance and identification of appraisal priorities;
- determination of whether administrative or statutory standards have been met;
- determination of time trends;
- providing a reference point for discrimination claims in appraisal appeals;
- adjust appraised values between reappraisals; and
- identify potential problems with appraisal procedures.
Section 126.96.36.199 of IAAO's Standard on Ratio Studies addresses data accuracy, stating that the findings of a ratio study are only as accurate as the data used in it. Staff involved in collecting, confirming, screening and adjusting sales data or making appraisals should be familiar with real estate conveyance practices in their region; proficient in the principles and practices of real estate appraisal; and aware of current real estate markets.
Furthermore, Section 3.3 of IAAO's Standard on Ratio Studies states that the reliability of the ratio study depends upon how well the sales used in the study reflect market values. The sales data should be verified, edited and adjusted as necessary for financing, personal property as well as the date of the transaction.
Section 4.5 of IAAO's Standard on Ratio Studies states that the purpose of a ratio study dictates how often it should be conducted. Regardless of the reappraisal cycle, ratio studies made by appraisers as an internal control procedure should be conducted at least annually. This allows the CAD to recognize and correct potential problems before they become serious, as might happen if ratio studies are conducted only in tandem with multi-year appraisal cycles.
When there is a revaluation, appraisers should, if possible, conduct at least four ratio studies:
- the first to establish a base-line of current appraisal performance;
- the second based upon preliminary values so that any major deficiency, such as a lack of uniformity between neighborhoods, can be corrected;
- the third based on values used in assessment notices sent to taxpayers; and
- the fourth based upon final values after completion of the first, informal phase of the appeals process.
The fourth study can be used in planning for the following year.
Sections 6.3 through 6.3.3 of IAAO's Standard on Ratio Studies describe the measurements of appraisal level. These measurements are based on measures of central tendency and should be calculated for each stratum and for such collections of strata as may be appropriate. Several common measures of central tendency (appraisal level) should be calculated in ratio studies and include:
- the median ratio – the middle ratio when the ratios are arrayed from low to high or high to low, if there is an even number of ratios, the median is the average of the two middle ratios. The median is the generally preferred measure of central tendency for the evaluation of overall appraisal performance, determining reappraisal priorities or evaluating the need for a reappraisal;
- the mean ratio – the arithmetic average of the ratios and is calculated by summing the ratios and dividing by the number of ratios. In a normal distribution, the mean will equal the median and is affected more by extreme ratios than the median. The sample mean has a slight upward bias in respect to the true level of assessment as it tends to slightly overestimate the true level of assessment; and
- the weighted mean ratio – the value weighted average of the ratios where the weights are proportionate to the sales prices and is also the ratio of the average assessed value and average sales price. It gives equal weight to each dollar of value in the sample, whereas the median and mean give equal weight to each parcel.
Section 10.5 of IAAO's Standard on Ratio Studies states that education and training can improve the effectiveness of ratio studies. Appraisal supervisors should conduct staff seminars or workshops to explain how to interpret reports; how ratio studies can be used to improve appraisal performance; and how the results will be used in house.
Ratio studies typically are included as part of the written documentation used to communicate results of a mass appraisal and comply with USPAP Standard 6, Rule 6-7:
In reconciling a mass appraisal an appraiser must:
(a) reconcile the quality and quantity of data available and analyzed within the approaches used and the applicability or suitability of the approaches used; and
(b) employee recognized mass appraisal testing procedures and techniques to ensure that standards of accuracy are maintained.
Appraisal districts use various methods of analysis when information about markets and market activity is unavailable. Some appraisal districts plot sales on maps to determine if physical boundaries, location or topography influence markets. Additional research often focuses on factors such as planned uses, road access, financing, views and access to water for recreational purposes.
Using the results of this research, appraisers can identify the boundaries of each market and the property characteristics that influence their value. They also can perform ratio studies of each market to determine whether or how much to adjust or modify local schedules.
By preparing and analyzing ratio studies, the CAD can plan appraisal maintenance programs that take into account the relationship between appraised or assessed values and market values, to ensure uniform appraisals and assessments. A properly designed ratio study is a powerful tool for analyzing appraisal performance and suggesting strategies for improvement.
For example, Nueces CAD's computerized appraisal system allows it to analyze its appraisals through ratio studies within and among property classifications. The CAD runs ratio studies within property classes, by school district and by county, at least quarterly, and makes reappraisal and value maintenance decisions based on the results. The appraisal district's automated appraisal system can produce ratio studies statistics on demand. Appraisal district staff need only enter the property sales information and identify the market area for study.
Analyze the results of ratio studies to identify areas of concern and take corrective actions to mitigate issues of value.