Sales Ratio Study
December 2006
The sales ratio study is an important assessment tool used by assessors and Department of Revenue officials to ensure that properties are uniformly assessed based on market value. This analysis utilizes statistical methods to measure the relationship between a property’s assessed value and its sale price by grouping individual sales according to property type and geographic area. Each set of sales is evaluated in regards to its average assessment level relative to market value as well as its degree of variability around the average assessment level. Conclusions about the overall level and quality of the assessment are derived from these results under the notion that the set of sales used is representative of all property assessments carried out for that specific property class by county, township, city, or neighborhood. Assessors regularly use this data to review an assessment, to plan an assessment, and to identify inequities that need to be addressed. The information is also valuable to taxpayers who use it to facilitate their understanding of the assessment process as it relates to equalization.
What kind of information is the sales ratio study based upon and how is it used?
The sales ratio study is based upon reliable and relevant data obtained from real estate transactions. This information is gathered from certificates of real estate value. It is carefully screened and edited to exclude sales that are not arms-length or open market. The acceptable sales are kept in a database and adjusted for terms and time. Each adjusted sale is compared to the assessor’s estimated market value by having a computer program calculate an individual sale ratio; that is done by dividing the assessor’s estimated market value by the adjusted sale price. All individual sale ratios are then sorted by property type and geographic area. They are arranged in order of magnitude and statistical computations are performed to evaluate the level and quality of the assessment.
What time frame does the sales ratio study cover?
There are three different sales ratio studies that cover three distinct time periods. The 12-month study includes sales that occur from October 1st of a given year to September 30th of the following year. It is used to determine the level and quality of the assessment for property tax equalization purposes. The 21-month study consists of sales that take place from January 1st in any given year to September 30th of the following year, and it is used for local government aid purposes. The 9-month study comprises sales that occur from January 1st to September 30th of a given year, and the Tax Court uses it for property tax equalization purposes. The sales used in the 12-month and 9-month studies are compared to the January 2nd assessor’s estimated market values that have been established in the year that the study period closes. In other words, for the 12-month study, sales that occurred between October 1, 2005 and September 30, 2006 are compared to the January 2, 2006 estimated market value for the 2006 sales ratio study. For the 21-month study, sales taking place in each year are compared to the January 2nd assessor’s estimated market values for that year.
What are some of the reasons for rejecting a sale for use in the sales ratio study?
Certain sales are rejected for use in the sales ratio study if it is determined during a sales verification that it is not an arms-length transaction or an open market sale. Some sales that do not meet the acceptance criteria include: old sales outside the study period; sales between related individuals or corporations; partial interest sales; sales that have terms that result in extremely large financing adjustments; sales of incomplete or partially assessed structures; prior interest sales; sales involving foreclosures, divorces, or bankruptcies; sales with excessive or unknown amounts of personal property; sales involving employee transfers and relocation; sale-leasebacks; bank sales, sales with allocated sale prices; and sales involving an assemblage of properties.
What types of adjustment are made to sales used in the sales ratio study?
Sale prices are adjusted to ensure they represent only the value of the real estate under current market conditions. Adjustments are made for terms of sale and time. When it is known that personal property items such as machinery, equipment, inventories, appliances, furniture, and crops are included in the sale price, they are deducted. The sale price is also adjusted to its cash equivalency when financing has influenced the price paid in the case of a contract for deed when the contract rate is above or below the market rate of interest or when the buyer pays discount points for the seller. Additionally, a time adjustment is made by using a ratio trending procedure when it has been observed that the price-level change is systematic and consistent over the time period being tested. Sales that occur before or after the assessment date, January 2nd, are adjusted upward or downward from this date depending on the dynamics of the marketplace.
What standards and criterion are applied to the sales ratio study?
The sales ratio study is conducted in accordance with state law, policies, and guidelines recommended by the International Association of Assessing Officers. A few of the most important standards and criterion used in the sales ratio study include: (1) all arms-length sales that occurred within the study period are used and matched with the assessor’s estimated market value; (2) all classes of property must have median sales ratios between 90% and 105%; (3) six sales in a taxing district constitute a suitable sample size for purposes of establishing a valid ratio in the equalization process; (4) agricultural split sales will be used to increase the number of agricultural sales considered in the study; (5) non-agricultural split sales will not be considered in the study; (6) measurements of assessment uniformity will be evaluated based upon the property type and established uniformity parameters; and (7) the “three strike” criteria will be applied to combined residential/seasonal recreational residential property and commercial/industrial property in small sample jurisdictions.
What indices are produced in the sales ratio study and what meaning do they have for assessors and taxpayers?
Sale ratio statistics provide several important measures of mass appraisal performance. The median ratio is the preferred measure of central tendency for most sales ratio study applications because it is easily understood and not affected by extreme ratios. It describes in one simple statistic the overall level at which properties are appraised. An acceptable level of assessment is achieved when the median ratio falls between 90% and 105%. The coefficient of dispersion (COD) and the price related differential (PRD) are measures of uniformity that quantify the quality and uniformity of the assessment. The COD is an index that describes how much variation there is between individual sale ratios and the median ratio. A low index indicates that appraisals are uniform and a high measurement shows that properties are being appraised at inconsistent percentages of market value. The amount of variation that is deemed acceptable varies by property type and location. The PRD is another index that measures assessment biases regarding high and low value properties. Appraisal uniformity is considered acceptable if it falls within a specified range, but it is said to be regressive if high value properties are under-appraised relative to low value properties or progressive if high value properties are over-appraised relative to low value properties.