Sales Ratio Technical Advisory Meeting
Minutes provided by Property Valuation Division (PVD).
Ratio
Study Issues
Issue: Should the commercial mixed-use sales
guidelines be relaxed?
Commercial/industrial sale activity is very low in many rural Kansas Counties. This leads to small sample size problems for the ratio study. The problem is not completely solved by the addition of supplemental sales or supplemental appraisals. Should PVD reconsider the inclusion of commercial parcels with mixed residential or other use? This change would help increase the sample size for commercial property (Subclass C) in small counties.
Background:
Currently PVD will include a
valid, mixed-use commercial sale if the non-commercial use does not contribute
more than 10% to the total property value.
This could include parcels that are predominately commercial, such as a
downtown row store with apartments above.
PVD Proposal:
PVD would like to revise the
mixed-use guideline if an insufficient number of sales were available in the
commercial subclass. We propose moving
the threshold from 10% to 25% if the county has less than 10 valid commercial
sales available for the ratio study year.
Mixed-use classes that included agricultural use value land would not be
eligible. If this alternative were
implemented, all valid commercial
mixed-use sales in the county would become candidates for inclusion if the
non-commercial component does not exceed 25%.
KDOR TAC Recommendation:
PVD may adjust the mixed-use
level from 10% to 25% for commercial / industrial subclass sales to be used in
the 2004 ratio study. This guideline
can be used to help increase sample size in counties that have averaged 25
valid commercial / industrial subclass sales over the last 5 study years. PVD will include valid sales of property in
the commercial / industrial subclass sales commercial / industrial subclass if
at least 75% of the appraised value is allocated to the commercial / industrial
subclass. Sales that involve
agricultural (use value land) class property will not be eligible for
inclusion. Typical mixed-use situations
will include commercial / industrial class property that includes a small
portion of residential use (downtown row store with apartments above), or
not-for-profit use (store building with a service club), or vacant lot (office
building with an adjacent vacant lot).
Guideline changes for PVD field staff will be prepared and distributes
as soon as possible.
Conclusions:
Ratio Study Technical Advisors stated they do not have a problem about adjusting the mixed-use level from 10% to 25% for commercial/industrial subclass sales in nonsampling counties. The mixed-use rule of greater than 10% will remain the same for sampling counties.
Ratio Study
Issue: Bank Re-sales
Should PVD continue
to include bank re-sales as valid indicators of market value?
Background:
Bank or lending institutions sometimes repossess a property as a result of a foreclosure or in lieu of a foreclosure. The bank will typically place these back on the open market. These properties often sell at the lower end of the market value range. This will tend to lower the median ratio and increase the COD. County Appraisers argue that these sales don’t fairly represent market value because the bank is dumping the property.
Bankers don’t tend to admit to dumping property because they have a fiduciary responsibility to obtain the highest price possible for the stockholders. Courts may also be inclined to accept these sales as valid when the property is exposed on the open market and are listed with a local real estate agent or broker.
In order to be valid these sales must be exposed on the open market in order to be considered a valid sale. PVD has argued that these sales will often bring a lower price because they are in poor, or neglected condition or little effort is made to offer these properties in the best light possible. Most homeowners know that many steps should be taken to present a house for sale in a manner that can bring the highest price on the open market. These range from a well manicured lawn, to pleasing aromas from the kitchen, to the optimal amount of clothes in a closet, to attractive furniture and arrangement….many of which have little to do with the actual real estate. PVD will agree that a one indication of a distressed sale could be a limited time for exposure on the open market.
We are also concerned about the general market for less desirable properties in some Kansas counties. Some rural counties are expected to lose between 20 and 40% of their population base over the next 30 years. Will homeowners be able to sell less desirable property in a market with fewer and fewer participants? Will banks see more repossession? Will more property owners be forced to take a loss in equity? Are we starting to see a significant decline in value for less desirable property?
PVD Recommendation:
It may not be appropriate to eliminate all these sales if they represent the market. The most extreme outliers will be trimmed before uniformity measures are calculated. PVD would like to identify these sales with a special source code and examine the conditions and exposure time before making a final decision. This examination will take about a year to complete.
Conclusions:
It
was decided to give this serious consideration starting with the 2005 ratio
study.
The general feeling was
that this type of sale should not be included as valid but a final decision was
not made.
Ratio Study Issue: Contiguous Property Sales
Can PVD reduce the
validation effort currently prescribed on sales that involve contiguous
properties and still obtain useful information?
Background:
Sometimes a buyer will purchase
an adjoining property that goes up for sale.
If the property was not exposed on the open market (a private
transaction) the sale is invalid.
However, it may be difficult to discover more clever marketing schemes
where, for example, the seller knows the buyer next door has a serious interest
in the property. The parcel is listed
for sale with an inflated asking price and the buyer is compelled to pay more
than fair market value, or risk losing the opportunity.
Issue:
Question No. 10 on the Sales
Validation Questionnaire asks: Does the buyer hold title to any adjoining
property? When an SVQ indicates yes, a phone call is currently
required, even if there is no other indication of an invalid sale on the
questionnaire. Once in a while the
field appraiser may discover that a sale was not exposed to the market (Question
# 9 answered incorrectly), but typically such phone calls don't yield much
useful information. Generally, we
receive only subjective information that isn't particularly reliable. For example, a buyer may respond that they
paid too much for a property (although the ratio may be low); yet also respond
that the price paid was within the realm of market value.
There is always a possibility
that a telephone interview will reveal some other question on the form that was
not answered correctly (that could invalidate the sale), but this is the case
for any sale validation questionnaire.
Questions that should invalidate
a contiguous parcel sale (regardless of the ratio):
·
Buyer was willing to pay more
than the asking price.
·
Buyer willing to pay more
than a fee appraisal amount
·
Sale price is substantially
less than the asking price
·
The property was exposed on
the market for a extended period of time with the same asking and selling price
·
Buyer was under duress to
purchase adjoining property
These questions may be
appropriate for any questionnaire that received a follow-up phone call.
Proposal from Field Supervisor:
PVD could reduce the field staff
validation requirements for contiguous parcel sales by implementing a ratio
test. PVD could require a phone call
only if the ratio was less than 80% or greater than 120%?
Ratio Study Section
Response:
We recognize the need to reduce
validation work in the field, but we oppose changes that may increase the
workload in Topeka (through an increase in appeals). A special 80/120 rule would prevent the appeal problem, but may
not catch all the invalid sales with acceptable ratios. We would like input from the TAC before a
proposal is offered from the ratio study
Conclusions:
Decision to proceed according to the current guidelines. Dr. Wasserstein considered these to be potentially suspect sales. All should be interviewed.
Ratio Study Issue: Down payment Assistance Programs
Should the sale price
of a home be adjusted if the buyer accepts a gift from down payment assistance
program?
Background:
A number of programs are available to assist homebuyers
with down payments and closing costs.
Two of the more popular programs are AmeriDreams, and Community Housing
Assistance Program of America (CHAPA).
These programs provide up to 10% of the sale price as a gift to buyers
at closing. The gift actually comes
from the seller, either directly or indirectly, at closing. Sellers will typically raise the asking
price of the home (or may become less willing to reduce the original list
price) to cover the cost of the gift (plus a small processing fee, around
$500). The home must appraise at the
higher asking price and the lender must agree to participate in the
program.
Issue:
Should the actual sale price
reflect the amount paid by the buyer (inflated asking price), or seller’s
proceeds at closing? Usually, we think
of sale price, as the amount a buyer will pay for a property, not the net
proceeds a seller could walk away with.
However, the price paid by the buyer under this scenario is artificially
high. We believe the gift amount from
the seller to the buyer should be deducted from the reported sale price.
It is difficult to tell from the
SVQ if the buyer participated in a down payment assistance program. It is impossible to tell if sale price
reported on the SVQ is the full sale price or the stated sale price less the
assistance gift.
Proposal:
If the county requests an
adjustment for a down payment assistance program gift, a copy of the closing
statement must be provided to PVD before the adjustment is considered.
Conclusions:
After discussion, Technical Advisors stated and adjustment should be made if possible. County appraisers stated they do not have a problem adjusting the sale price.
These sales are difficult to identify. If the county had identified and adjusted for the gift, PVD will verify the amount with the buyer and/or seller and make the adjustment also.
Ratio Study Issue: Residential Sampling Sales
Can
PVD reduce the validation effort currently required for sales that involve
multiple-parcel and mixed residential uses and still comply with statutes and
accomplish the study goals?
Background:
PVD is required to perform a
ratio on the residential subclass, to judge how well a county appraises
residential property. In the
residential sampling counties, we do not use multiple-parcel or mixed-use sales
when they involve residential property.
The underlying rationale is that there are plenty of single-parcel sales
of residential property that can be placed in a distinct representation
category. Multiple residential parcel
properties and mixed use residential typically constitute less than one percent
of the total residential parcels in a county.
Mixed-residential is a
"sub-subclass," created to keep these sales separate from more pure
residential sales for stratification purposes (under KSA 79-1486 (g)). The Mixed-residential (MR) subclass is a
holding place for sales of properties that are not purely residential. While another use is notable in degree (in
excess of 10%), residential is still the primary use. Thus, the strata class
"mixed-residential" (MR).
Comment From Field Supervisor:
There is no statutory
requirement to judge the county's performance on mixed-use residential sales
and these sales are placed in a miscellaneous category which includes sales
from other mixed-use groups, utility, exempt, non-profit and other
subclasses. Separating the
"mixed-residential" sales allows PVD to develop a sharper picture of
how well the county is valuing the typical residential property. When we can develop a sharp picture of a
county's performance on the representative residential subclass, why do we need
to process these sales? While these
sales need to be accounted for, they don't have any analytical value in the
context of judging how well a county values residential property in a large,
sampling county. They should be
assigned an invalid code for technical reasons.
Comment From Ratio Study
Section:
KSA 79-1486 defines three types
of sales:
A multi-parcel residential sale
cannot automatically qualify as “unvalidated” if the COV number was selected
during the random sampling process.
However, we have been invalidating these sales in residential sampling
counties. The rational has been that
they don’t have a bucket (sub-stratum) to be placed in and they constitute very
few sales in the residential category.
Technically, we assign a “target achieved” designation because we have
no way to determine the number of multi-parcel sales or characteristic profile
of multi-parcel residential properties in a county.
We never know before hand what
parcels will sell in a multi-parcel transaction. A multi-parcel sale could involve two single-family dwelling
parcels (that fall into two different year built buckets) in different
neighborhoods or perhaps an apartment complex composed of several parcels.
However, it is more problematic to discard a mixed-use residential sale (on a single-parcel or on with multiple-parcel transfers). A mixed residential use sale may be discovered during the random sampling process. When it is determined to be outside residential subclass it cannot be thrown into the unvalidated residential pile. It should be determined to be valid or invalid. Since there is a place for it to reside (the MR subclass) we must determine if it is valid or invalid.
It is important for the ratio
study section to account for all sales.
We are also expected to show the correct proportion of valid to invalid
sales for each subclass. We do not
want to distort the accounting process by classifying sales as invalid because
it will save verification effort in the field.
Proposal:
The ratio study section should reexamine the current practice of invalidating multi-parcel residential class sales in sampling counties. Where practical these should be placed in the buckets (substrata categories) already available. In cases where a multi-parcel residential sale would fall into two or more buckets it may be necessary to indicate a special situation, such as no substratum available. PVD can study these occurrences over the next year and develop a more appropriate method to account for these sales.
Conclusions:
After some discussion, Technical Advisors expressed no concerns with the current methods and stated to continue with the current methods.
Informal hearing issue.
Two commercial properties had adjusted certified values after change of value notices were mailed and after sending the file to PVD. These changes were not due to an informal hearing.
All Technical Advisors agreed the two commercial sales should be left out of the Ratio Study due to a lack of appraisal/sale price independence.
Sales
Ratio Technical Advisory Meeting.doc