Findings of the Appraisal Standards Review
This chapter of the report addresses commendations, findings and recommendations from the ASR of the Somervell CAD in three sections:
2.1 Commendable Practice
2.2 Key Recommendations
2.3 Other Recommendation
Somervell CAD formed in 1981 and became active in 1982. As of Jan. 5, 2009, Somervell CAD had six full-time employees, including two supervisors and three full-time appraisers. Somervell CAD contracts with a professional appraisal services firm to appraise industrial, oil, gas, minerals and utility property.
Four Somervell CAD board members responded to PTAD's Appraisal District Board of Directors Questionnaire, which is designed to assess the board's understanding and perceptions of the CAD's operations. The questionnaire includes 21 questions and a section providing for additional comments about specific challenges or opportunities facing the appraisal district.
The responding board members agreed with most of the survey statements. Three directors indicated the board did not provide personnel policies to all staff. Two directors indicated the board has not documented a set of policies and procedures to guide the CAD's operation.
As part of its review process, PTAD identifies CADs' best practices. These commendable practices may improve efficiency or, in some instances, address past operational weaknesses. The ASR identified one best practice in Somervell CAD that other appraisal districts may use to improve operations.
Somervell CAD implemented technological improvements to assist staff in appraising property.
IAAO's Standard on Facilities, Computers, Equipment, and Supplies points out the following:
Computers expand analytical capabilities, make possible the use of advanced mass appraisal techniques, and generally improve the accuracy and equity of valuations. Hence, computers increase both the effectiveness and efficiency of the assessment office.
In 2004, the CAD installed a computer assisted mass appraisal (CAMA) system. The following year, the CAD installed a geographic information system (GIS) and integrated both systems.
The CAD added various file layers such as street centerline, street boundaries and property boundary lines to its GIS. All properties in the county have been delineated in the GIS. This process allowed the CAD to indentify land areas not on the assessment roll.
The software has aerial photography that permits the CAD to discover missed improvements. Aerial photographs and boundary lines are coordinated, so the CAD can produce colored maps and photographs with the property identifier.
Deeds and survey maps are attached to the appraisal system as scanned documents. This provides effective tools for the CAD's appraisers to identify property during field inspections.
The CAD provides maps and pictures at ARB hearing hearings, which improve the CAD's ability to explain property valuations.
Somervell CAD's use of integrated GIS and CAMA systems provides staff appraisers the ability to more effectively appraise property.
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 Somervell CAD's appraisal activities.
Somervell CAD does not have written real property discovery procedures.
IAAO's Standard on Mass Appraisal of Real Property, Section 3.3, states, "The [appraiser] should collect and maintain sufficient property characteristics data for classification, valuation and other purposes. Accurate valuation of real property by any method requires descriptions of land and building characteristics." Section 3.3.1 recommends that the following property characteristics be collected and maintained:
- factors that influence the market in the locale in question;
- requirements of the valuation methods that will be employed;
- requirements of classification and property tax policy;
- requirements of other governmental and private users; and
- marginal benefits and costs of collecting and maintaining each property characteristic.
The chief appraiser, who is new with the CAD, did not know what procedures the CAD used during the 2007 appraisal year. For the 2009 appraisal year, Somervell CAD appraisers perform field work by abstracts. For each abstract map, the CAD's appraisers gather all building permits and all the property records before doing fieldwork. Appraisers inspect all property within each abstract.
CAD appraisers use GIS and aerial photographs to check for improvements on large tracts of land that cannot be seen from the road. Using this process for the 2009-10 reappraisal cycle, the appraisers identified 57 omitted properties in the first three weeks of field inspection.
Somervell CAD has a two-page discovery procedure for business personal property. Although this document is short, it has useful information about the business personal property methods of discovery, data gathering and office procedures. Procedures for calculating appraised values are included in the appraisal manual. A review of sample business personal property records, however, indicated there are no calculations from original value or cost new to appraised value, even when taxpayers provide original cost information.
For the 2009 appraisal year, Somervell CAD has three appraisers, including the chief appraiser, who do field inspections and valuations. Frequent turnover in the position of chief appraiser, coupled with the lack of a good property discovery and data collection manual, may have resulted in an inconsistent use of discovery procedures. Some examples of data collection errors from the sample properties reviewed are as follows:
- missing year built, effective year built and condition rating;
- low land-to-building ratios;
- first floor area is depreciated but the second floor and other improvements are not depreciated;
- use of either depreciation or physical deterioration;
- newer commercial building with effective year built of 1810, but only has 20 percent depreciation;
- commercial building built in 2000 with no depreciation;
- two hotels, one with an effective year built 1919 with only 15 percent depreciation, and the other with an effective year built 2000 with 10 percent depreciation; and
- historic building, commercial use, rehabilitated, effective year built 1996, 40 percent physical deterioration.
Lack of a detailed data collection procedures manual limits the CAD's ability to systematically indentify and list new construction. This can lead to inconsistencies in data collection and application of valuation formulas that may contribute to inconsistent valuations and unacceptable findings in the PVS.
Chambers CAD, for example, developed a property inspection and data collection process and allows for checks and balances, which all contribute to more accurate appraisal records.
Prepare and use a detailed procedures manual for all functions of inventory discovery and data collection of all property classes.
Somervell CAD's appraisal manuals do not properly document the procedures needed to calibrate valuation models.
Property Tax Code Section 23.01, (b), requires that:
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 property using mass appraisal standards, the mass appraisal standards must comply with the Uniform Standard of Professional Appraisal Practices. 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's market value.
Somervell CAD's appraisal manual is a collection of cost improvement tables and land unit value tables for residential and commercial properties. The manual contains residential and commercial improvement tables, three sets of land tables and several depreciation tables. It does not have a commercial depreciation table. The chief appraiser said the CAD uses Marshall & Swift deprecation tables for commercial properties. Improvements, other than the main areas, are calculated as a percentage of the main area cost per square foot. There are no descriptions of the various classes for either residential or commercial property classes. The manual has no pictures of sample properties or instructions for the process of valuation.
A review of the CAD's appraisal manual and records of sample properties showed the following situations that are not conducive to accurate estimates of market value:
- missing instructions for application of appraisal procedures;
- the commercial class table names do not have codes that match the record cards' classification or sub-classifications;
- cost tables in the residential manual do not match price per square foot on property records; and
- residential depreciation tables do not match the actual depreciation on the record cards.
Without accurately developed cost new, depreciation and land unit value schedules, the CAD's mass appraisal models are deficient and may result in incorrect applications or inaccurate judgments made by the CAD's appraisers. This can result in inaccurate and inconsistent estimates of market value.
Nueces CAD, for example, has written and comprehensive residential, commercial, personal property and land appraisal manuals. The manuals comply with USPAP, IAAO and the Property Tax Code. Each appraisal department has its own appraisal manual addressing the various approaches to value, classification guidelines and staff responsibilities. While Nueces CAD is a larger appraisal district, appraisal processes and standards are the same regardless of CAD size. A smaller CAD can modify the manuals to fit its level of staffing and other resources.
Upgrade appraisal manuals to include detailed documentation needed to ensure the CAD's mass appraisal models are properly calibrated.
Somervell CAD's land, improvement and business personal property tables are not timely and not regularly updated.
According to Property Tax Code Section 23.011, when using the cost approach to value, the chief appraiser must do the following:
(1) use cost data obtained from generally accepted sources;
(2) make any appropriate adjustment for physical, functional, or economic obsolescence;
(3) make available to the public on request cost data developed and used by the chief appraiser as applied to all properties within a property category and may charge a reasonable fee to the public for data;
(4) clearly state the reason for any variation between generally accepted cost data and locally produced cost data if the data vary by more than 10 percent; and
(5) make 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.
Before the 2004 appraisal year, the Somervell CAD's appraisal processes were performed on paper records with manual calculations. When the CAMA was installed, the vendor provided initial land and improvement cost tables. The CAMA's cost improvement unit values for residential property have changed from the set of unit cost tables in the 2004 appraisal manual. The two prior chief appraisers did not document changes from the 2004 appraisal manual. There are inconsistencies in the application of the cost unit value tables, the use of improvement condition ratings, application of depreciation and market updates of application of land tables.
A review of sample property cards showed the following inconsistencies:
- condition is missing from some residential and commercial records;
- when condition is present, it does not impact the improvement values;
- property records' improvement depreciation percentages do not match the cost schedule's depreciation tables in the appraisal manual;
- some land values have remained constant since the 2000 assessment roll, while other land values have almost tripled and some have been reduced; and
- special pricing that is not in the cost tables is used to value some commercial improvements.
The CAD's appraisal records have four places to make location adjustments: subdivision land, subdivision building, neighborhood land and neighborhood building. Most of the sample properties have these location adjustments at 100 percent or blank. In the sample, only one record had a subdivision building adjustment at 120 percent, but the same record has a 90 percent overall building adjustment.
Because the property characteristics are inconsistently collected and land values are inconsistently applied, Somervell CAD is unable to maintain consistent and equitable values. These problems, present for a number of years, impact the chief appraiser's ability to market adjust the cost tables and apply new cost tables to the entire county. Since current data is inconsistent, applying new cost tables through a mass appraisal process to all properties may exaggerate existing inequities. The chief appraiser began inspecting all properties in the 2009-10 reappraisal cycle.
Somervell CAD uses the Comptroller's business personal property cost tables to value personal property. These tables are from 2003, and the CAD did not update them to the 2007 appraisal year. This is one of the reasons that business personal property values in Glen Rose ISD are below acceptable levels in the 2007 PVS.
According to IAAO's Standard on Mass Appraisal of Real Property, "Mass appraisal is the process of valuing a group of properties as of a given date, using common data, standardized methods and statistical testing. In determining the value of a parcel, appraisers must rely upon valuation equations, tables and schedules developed through mathematical analysis of market data."
Annually update and document a coordinated set of detailed land, improvements and business personal property schedules that track local market values for use in the CAD's appraisal system.
Somervell CAD lacks written procedures for gathering and verifying market sales transactions.
According to IAAO's Property Appraisal and Assessment Administration, Chapter 5, Data Collection and Management, the reliability of any valuation model or sales ratio studies depend upon the quantity and quality of its data. Sales data must be collected, edited and adjusted to obtain valid indicators of market value. Accurate sales data is needed for specifying and calibrating valuation models and for sales ratio studies.
Somervell CAD does not have written procedures for sales validation, performance and use of ratio studies. The chief appraiser describes the CAD's processes as follows:
- gather sales from county clerk deeds, buyers and sellers;
- determine if sales are arms-length;
- load sales transaction information into appraisal system;
- flag unusual sales for appraiser review; and
- run ratio study.
Sales of more than $250,000 are always reviewed by the appraisers. If the buyers and sellers both respond to inquiries and their answers are different, the sales transfer questionnaires are referred to an appraiser for review. The CAD's appraisers make adjustments for finance, business personal property and time, but these adjustments are used sparingly. The CAD has no written procedures on how and when to make the adjustments.
The turnover in the chief appraiser position in the last four years is an important reason for Somervell CAD to have written sales gathering procedures and instructions for proper screening of sales. Proper sales gathering and validation procedures are the only way to apply economic indicators in a consistent manner. Lack of sales verification procedures leads to the potential for inconsistency in the cost tables, land tables and neighborhood percentage adjustments.
Austin CAD, for example, improved residential appraisal accuracy by strengthening sales data gathering practices. To improve sales data collection, the chief appraiser sent letters to buyers and sellers to obtain sales information; developed and improved relationships with appraisers and agents; and collected sales information through the informal and formal protest processes.
Develop written procedures for sales transaction discovery and verification.
Somervell CAD lacks written procedures for preparation and use of ratio studies.
The IAAO Standard on Ratio Studies sets out the following seven steps to design a ratio studies program:
Step 1 - Define the purpose, scope and objectives;
Step 2 - Design;
Step 3 - Stratification;
Step 4 - Collection and preparation of market data;
Step 5 - Matching of appraisal and market data;
Step 6 - Statistical analysis; and
Step 7 - Evaluation and use of results.
IAAO explains that appraisal offices should use ratio studies for quality assurance, including the data integrity review; assessment level and uniformity analysis; and CAMA system performance testing.
Somervell CAD has no documented ratio studies for the 2007 appraisal year. It provided two ratio studies performed in 2008 with sales from 2007 and the first few months of 2008. The first report is an overall report of 2007 sales that exist in the appraisal system. The summary statistics from this report indicate the level of assessment is below acceptable limits with a median ratio of 79.01 percent. The appraisal system report was only provided as an example of the type of report available from the CAD's appraisal system.
The CAD's current ratio study procedures involve the extraction of sales transfer information from its appraisal system. This data is imported into Excel for analysis. The chief appraiser provided a spreadsheet with sales transactions from 2007 and the first five months of 2008. The median ratio for Category A was 93.38 percent compared with the 2007 PVS of 94.59 for Glen Rose ISD. The Category C median ratio is 60.59 percent, which was not tested in the 2007 PVS for Glen Rose ISD. The median ratio from the CAD's list for Subcategory D3 is 63.25 percent compared with the 2007 PVS' ratio of 93.99 percent.
Somervell CAD's internal ratio study is not its final ratio study for 2008 but is an example of its ratio studies. The CAD's ratio study using Excel confirms the lower levels of appraised values-to-sale prices as reported in the 2007 PVS.
The CAD's ratio studies confirm the PVS findings that Somervell CAD has inaccurately appraised its real and personal property in Glen Rose ISD. Ratio studies can be used to update cost tables and neighborhood adjustments. The chief appraiser began performing internal ratio studies and is developing written procedures.
The IAAO Standard on Ratio Studies points out the following in Section 8.4 Documentation:
Ratio study procedures should be documented thoroughly. This documentation should take three forms. First, a general guideline should explain the design of the study. This guideline should be updated whenever procedures are changed. Second, all software applications should be documented so that the program logic can be reviewed and modified as needed. Third, a user's manual should explain how to execute the study or run the software.
Complete written procedures to use in developing internal ratio studies and use them in quality control of appraisal performance.
The CAD's periodic reappraisal plan does not reflect the operational directions for the CAD's staff efforts over the period of its reappraisal cycle.
Property Tax Code Section 25.18(b) requires that a reappraisal plan provide for the following reappraisal activities for all real and personal property in the district at least once every three years:
- 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;
- identifying and updating relevant characteristics of each property in the appraisal records;
- defining market areas in the district;
- identifying property characteristics that affect property value in each market area, including:
- the location and market area of property;
- physical attributes of property, such as size, age and condition;
- legal and economic attributes; and
- easements, covenants, leases, reservations, contracts, declarations, special assessments, ordinances or legal restrictions;
- developing an appraisal model that reflects the relationship among the characteristics affecting value in each market area and determines the contribution of individual property characteristics;
- applying the conclusions reflected in the model to the characteristics of the properties being appraised; and reviewing the appraisal results to determine value; and
- reviewing the appraisal results to determine value.
Somervell CAD's reappraisal plans for 2007-08 and 2009-10 are identical documents except for changes in the years. The two plans quote Property Tax Code Section 25.18, but neither plan fully follows its requirements. The CAD's reappraisal plan does not include the following:
- indentify relevant property characteristics that affect property values within the county;
- develop the appraisal models, which reflect the relationship of property characteristics that affect values or discuss their contribution to market values;
- relate how the model conclusions are applied to the properties being appraised; and
- review statistical results to indicate areas of potential improvement.
The reappraisal plan contradicts itself on the CAD's actual reappraisal cycle. Under the section, Revaluation Decisions (Reappraisal Cycle), of the 2007-08 reappraisal plan, it indicates "the Board of Directors and Chief Appraiser, reappraise all property in the district every year." Under the section Somervell Central Appraisal District Residential, Commercial, Rural and Personal Property 2007/2008 Reappraisal Plan, the reappraisal plan states the CAD area is divided into three-year reappraisal cycle. It lists the sections of the county that are reappraised in areas one, two and three. This division of the county is repeated in the 2009-10 reappraisal plan.
The chief appraiser indicated the CAD is on a two-year reappraisal cycle. He said field inspections were restarted for the 2009 assessment roll cycle. He states that complete field inspections may not have been performed for several years.
Since 2004, the CAD has had three chief appraisers. Such turnover in leadership presents challenges to a CAD, and underlines the need for a reappraisal plan that provides direction to the CAD's staff. Lack of a coherent reappraisal plan can allow the CAD's activities to drift and cause the CAD to waste time and money.
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.
Revise the current reappraisal plan to include specific details to comply with Property Tax Code Section 25.18.
During the review process, PTAD identified a 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. Somervell CAD is not obligated to implement this recommendation, but it is provided here for consideration as an additional way to enhance operational effectiveness and efficiency.
Somervell CAD relies on the cost approach to appraise property, and does not use statistical software to calibrate its appraisal model with the sales and income approaches.
IAAO's Standard on Mass Appraisal of Real Property points out that, "Careful and extensive market analysis is required for both specification and calibration of a model that estimates values accurately. All three approaches to value-the cost approach, the sales comparison approach, and the income approach-are modeled for mass appraisal."
Somervell CAD has inaccurately appraised land and improvements through the almost exclusive use of the cost approach. This has led to inequitable property appraisals.
While the CAD's CAMA system has the capacity to perform ratio studies, the CAD does not properly use this feature. This results in inaccurate market values. Ratio studies can only indicate where the cost approach is working correctly or incorrectly. Additional appraisal tools, such as statistical software to identify variations in the county real estate market, are used to improve the appraisal model. Statistical software provides market model capabilities that appraisers use to adjust individual component of buildings or to directly estimate market values.
IAAO Property Appraisal and Assessment Administration publication identifies several model structures, including the hybrid model, as a method to develop adjustment for the cost approach. It notes that:
The hybrid adjustment method classifies attributes as quantitative or qualitative. Quantitative attributes are usually additive and can easily be expressed as dollar amounts; qualitative attributes are usually expressed as percentages and can be either additive or multiplicative.
Building and improvement attributes from a hybrid model, which are calibrated directly from the market, can be separately calibrated and applied to a model structure representing the cost approach, sales comparison approach and income approach, as applicable.
A best practice is to calibrate the models (cost, sales comparison and income approaches) directly against the market. Since most appraisal systems have limited market analysis capabilities, CADs can supplement appraisal systems with generic statistical software packages. Statistical software systems are only appraisal tools. When properly used, companion software can improve the accuracy and equity of the CAD's appraisals.
Use statistical software to specify and calibrate all three approaches to market value, when appropriate, according to the Property Tax Code and generally accepted appraisal standards and practices.