DEPARTMENT OF REVENUE BUREAU OF LOCAL ASSESSMENT STANDARD FOR CONDUCTING AN[f^ALUATING RATIO STUDIES . t MASSACHUSETTS DEPARTMENT OF REVENUE BUREAU or LOCAL ASSESSMENT STANDABD FOR CONDUCTING AND EVALUATING RATIO STUDIES Mastachuitttt Ctntr«l Laws Chapttr 56 51 requlrei tht Commlssiono of R«v«nut to makti arid ravist "such rtasonabla cults, reguUtions, And 9uld«lines« as may bt nectssary to tstablish minimum standards of asstssment ptrtormance." Tha purpose of this guidellna is to establish a standard framework for evaluating the level of assessment in each community The assessment / sales ratio study is one of the principal tools used in evaluating the level of assessment. In addition to this guideline, assessors should refer to the International Association of Assessing Officers Standard on Ratio Studies, and the appropriate sections of the lAAO textbooTTT Property Appraisal and Assessment Administration. Date of the Analysis for th« purpose of the triennial certification requirement, the effective data of the analysis il tht January 1 previous to the fiscal year of certification. For example, for an rY92 ctrtification community, tht tfftctivt data of tht ratio study is January 1, 1991. Since the object of the valuation program is to estimate fair market value aj^ of January 1 of a particular year, the ratio study used to evaluate IKat valuation program should reflect market conditions that same January 1. There are three basic methods commonly used to conduct the ratio studyi 1. Sales which occurred betwten January 1 and December 31 of the previous ytar, unadjusttd for date of sale. 2. Salts which occurred betwttn January 1 and December 31 of the previous year, adjusted for date of sale forward to January 3. Sales, adjusted or unadjusted, that "bracket" the assessment date. Tot txamplt, for January 1, 1991 valuation date, sales that took place bttwttn July 1, 1990 and Junt 30« 1991. Adjusting for Data of Saltt Tht tfftctivt data of tht ratio* study suomitted for ctrtTIicatTon of values is January 1. If method I, the use of the previous ytars' salts is stltcttd, all sale prices should be adjusted to tht data of salt. If tht time adjustment factor for the class of property being analysed has been documented to be or - 5\ or lass per year, this adjustment is not necessary. i Hethods for Devloping Ti«» Adjuttaent ractort Reference to Appendix 5-3 of the XAAO text it recommended. Th«re are 4 nethodt that are typically uted to develop time adjustment factore 1. Paired tales analytit 2. Retalet analytit 3. Salet ratio trend analytit 4. Multiple rtgrettion analytit The applicability and acceptability of each nethod it highly dependent on the volume and quality of the data uted in the analytit. The development and ute of thete factort autt be fully documented. Sales pricet are typically adjutted by month or quarter. Annual adjustment factort can be imprecite and thould be avoided. Property Typet Evaluated by Attettaent»Salet Ratio Studiet Assessment - talet ratio ttudiet (ASR't) are utilized to evaluate one to three family retidential propertyi apartment, condominiumt and , residential vacant land, when a tufficient number of talet exitt in the community. It it recommended that the attettor ute at Itatt 10 talet in any ttudy. Only "valid", arm't length talet thould be uted in a ratio ttudy. The following general property groupt thould terve at the starting point for the ratio ttudyt Deteription of Group State Ute Code Single family retidential HTI Condominiumt 102 Two Family 104 Three Family 105 Apartments Developable Land 130 Potentially Developable Land 131 Undevelopable Land 132 If there it an intufficient number of talet for a particular group, certain categoriet or groupt of propertiet can be combined to enhance the analytit. For example, ute eodet 130 throuah 132 mioht be combined for analytical purpotet. Remediet for intufficient tamplt tize include: 1. Rettratification of property groupt 2. Extending the period from which talet are drawn 3. Using independent appraitalt in lieu of telling price Next, propertlei ihould be stratified to create subgroups for analysis. The following subgroups should be analyzed, if sufficient sales are ava11ablet * sale price quartiles * neighborhoods or other locational variables building styles building age* groups building size groups by sale month or quarter * locatlondl groups (waterfront, water view, etc.) * Condominium complexes (if appropriate) Those groups mar)(ed by an above should be analyzed by the assessors prior to request for preliminary certification. The request for certification form can be used to summarize this information. For each group analyzed, a spreadsheet should be developed for analytical purposes. It should contain the following minimum level of Information: Date of analysis Criteria which identifies the group (i.e. class 101 ranches) parcel identifier (tax map i, etc.) Street address Sale date Sale price Assessed value Assessment/sales ratio Median ratio for the group Absolute dispersion (about the median) Coefficient of dispersion for the group At the conclusion of the analysis, the results of all the individual ratio studies should be summarized in a tabular format. The summary should indicate the the type of property analyzed, the number of sales in the group, the median ratio for the group, and the coefficient of dispersion for each group. This summary form should be available for review by DOR certification personnel. Prior to ma)(ing any firm conclusions from the ratio study, It should be determined whether further stratification of data Is justified. Stratification is typically justified is there are sufficient sales In the group to malce a valuation conclusion. -3- . . Property Types Evaluated by Other Typea of Ratio Studies Due to a lack of sufficient sales, the evaluation of certain types of property may not be suitable for assessment / sales ratio studies. When sufficient land sales are not available, assessors often use various residual techniques to develop residential, commercial, and industrial land schedules. If this is the case, the accuracy and uniformity of the resulting land schedule should be measured by comparing the proposed land value indicated by the schedule, with the value indicated by the residual process previously applied to each property analysed. Median ratios, and COD's should be produced for each strata of property, as applicable ACCURACY AND RELIABILITY OP DATA ANALYSIS When reviewing the results of a ratio study, the following points should be considered: 1. The validity and accuracy of any real estate market analysis program is dependent on the use of verified, accurate data. Studies made with unverified sales or property descriptive data is unreliable, and conclusions made from such analysis may be faulty and misleading. A sales verification and inspection program is a critical part of any valuation procedure and will be reviewed during the certification process. Assessors should carefully document the results of the sales verification program. A review of this process should be done as early in the certification process as possible, to avoid unnecessary delays at the final phases. 2. The reliability of the results of any ratio analysis is dependent on the "sample size**. The more sales or appraisals analyzed, the more confident the assessor can be that the results reasonably reflect true market conditions. Conclusions made from small samples are likely to be unreliable 3. The lower the measure of dispersion computed in the study (Coefficient of Dispersion, Coefficient of Variation, standard deviation), the more confident the appraiser can be that the results actually "mirror" the market. High measures of dispersion generally indicate that conclusions made from the analysis may not be reliable. 4. The samples chosen to study (either sales or appraisals) should be representative of the class of property being analyzed. The make-up of the groups studied should be representative of the community as a whole. 5. Th« analysis of homogeneous groups (stratification) is one of tha ktys to successful real estate market analysis. Attempting to categorize diverse properties into a single group will likely lead to unsatisfactory or misleading results. 6. The results of the market analysis should be carefully reviewed in its entirety before conclusions are made. Measures of dispersion, such as coefficient of dispersion (COO), standard deviation, and coefficient of variation (GOV) should be carefully monitored. A high COD may indicate that further analysis, or even complete revaluation of a type of property is needed. Large differences in assessment ratios between various types or classes of property may indicate a need for a more comprehensive analysis or revaluation decision. As a general rule, variations in the median (or mean) ratio of more than 5 points between individual groups and the largest oroup (typically single family residential), or a range (difference between the highest and lowest medians) of 10% or more may be indicative potential problems with the valuation process, and should be satisfactorily addressed before preliminary certification can be granted. Estimating Performance for Unsold Properties The assessment / sales ratio study is used because sold properties are considered the best estimate of market performance. The Department will make reasonable checks to ensure that unsold properties have been appraised in a similar, uniform manner when compared to sold properties, and are being appraised at market value levels. One or more of the following methods will be used in making this conclusion: 1. Comparing the principal valuation system variables for selected, sample groups of sold and unsold properties. These valuation variables typically include: Building grade Building condition Story height Physical depreciation factors used Functional obsolescence Economic (locational) obsolescence Locational adjustments Other adjustments, as appropriate 2. Comparison of average value changes of groups of similar sold and unsold properties. 3. Comparison of average unit values between similar groups of sold and unsold properties. Ratio Study Ptrforaanct Standards 1. For each comaunlty aubjact to cartification, tht atdian assessment /sal.es ratio for aach of the following types of residential property Bust be demonstrated to be in the range 90% to 1101. The coefficient of dispersion (COD) calculated with respect to the median ratio should meet the following guidelines: Property Type Coefficient of Dispersion a. Single family 10.0% b. Two family 12.0% c. Three family 12.0% d. Apartments 15.0% e. Condominiums 10.0% f. Vacant land 20.0% 2. The range of median ratios between the largest residential class, as measured by the number of parcels in that class, and any other class, or strata should be 5.0% or less. The median ratio for the above classes should not be less than 90%. 3. when market value indicators other than sales are utilized (i.e. residual analysis, etc.), the median ratio should be in the range of 90% to 110%, and should be within 5% of the ratio computed for the single family residential class. 4. For each class of property having more than 20 sales in the analysis period, the median ratio for each price quartile should be computed. The price quartiles are established by arraying the selling prices from low to high, and dividing them into four groups having approximately equal numbers of sold properties. The median assessment / sales ratio for each group is then identified. The median ratio for each quartile should fall within a range of -f/- 5% of the median ratio for the entire class, group, or strata being analyzed. 5. For each class of property having more than 10 but fewer than 20 sales in the analysis period, the sample is divided into two approximately equal halves, and the median ratio for each half is identified. The median ratio for each half should fall within a range of •»-/•> 5% of the median ratio for the entire class, group, or strata being analyzed. 6. For each condominium complex having 10 or more sales, the median assessment /sales ratio should be within 5% of that of the condominium class as a whole. 7. For each neighborhood or similar locational identifier used in the valuation process, a median ratio and coefficient of dispersion should be computed. If sufficient sales exist, this neighborhood analysis should be stratified by property class. The median for aach strata analyzed should be within 5% of that of the group as a whole. t Evaluating the Level of Aseeifent In the Absence of Sales The DOR must certify that all classes and types of property are valued at full and fair cash value, not just those in which sufficient numbers of properties have sold to conduct assessment / sales ratio studies. For those property types that lack sufficient sales* assessors should present alternative methods of analysis which support the proposed assessed values as being at market value levels. The following methods are typically usedi 1. Analysis of valuation components Income producing properties rarely sell in sufficient numbers to use an assessment / sales ratio study to measure assessment level. If the income approach was used to estimate value, the analysis of the basic components of that approach may yield a conclusion as to the acceptable market valuation of these properties. For the income approach, these components typically are: rent schedules vacancy schedules and allowances expense schedules capitalisation rate components For residential properties, the use of a calibrated cost manual may provide an indication of market value levels. The manual must be calibrated to local market conditions, including: Land values Basic building costs Depreciation schedules Time / location modifiers 2. Assessment / Appraisal Studies Assessors can substitute independent appraisals in the ratio study, when sold properties are not available. All of the same guidelines for ratio studies still apply. In the absence of sales within the community, assessors may have to use sales of similar properties from neighboring communities as comparables in the appraisal reports. 3. Unit Value Comparisons In this method, the appraiser compares the unit values (I.e. price per square foot of land) with those values obtained from either independent appraisals, or sales from neighboring communities. 4. Supplemental use of listing prices In the absence of sales, the offering prices for properties listed for sale may be an indication of market levels. Listings tend to establish the upper limit of value only, and should be used only with great caution. -7- Digitized by the Internet Archive 2014 in -8- https://archive.org/details/standardforconduOOnnass