Using Assessed Values in Property Valuations

1. Using Assessed Values in Property Valuations Dr Song Shi School of Economics and Finance Massey University

2. Motivation • Using assessed values to improve the sales comparison approach in property valuations • Identify valuation error sources • How to correct them • Provide new thinking and technique for real estate appraisals

3. Literature • The selection and comparison of sales can be sophisticated and complicated • Lentz and Wang (1998) classify the evolution of the appraisal methodologies into three categories • The contemporary adjustment-grid method by Vandell (1991), Gau, et al. (1992, 1994), and Lai, et al. (2008). • Non-traditional regression model ,artificial intelligence and spatial analysis methods , e.g. by Peterson and Flanagan (2009), Zurada, et al. (2011), Bourassa, et al. (2010), Osland (2010) and Beamonte, et al. (2013).

4. What Is The Research Problem? • However, as pointed out by Epley (1997) all these methods are “based on the presumption that a sufficient number of closed sales of comparable properties always exist in a finite time period such that a statistically reliable sample can be found…The theory is good, but not measurable or applicable (p.175-176)”.

5. Review of The Traditional Sales Comparison Approach • (1) • (2) Where represents the ith property’s sale price at time period t1, represents the vector of land characteristics (including lot size, shape, contour, views and other amenities), represents the vector of building characteristics (including building age, floor area, construction materials, condition, modernisation, number of bathrooms, garage and others), and is the submarket/neighbourhood dummy variables.

6. The Proposed Approach – “The Improved Net Rate” Analysis • Using the property’s assessed land value as a proxy to represent the land component in property valuations • (5) • is the estimated total value of the subject property using assessed land value statistics • is the assessed land value of the subject property • is the derived improvement value for the ith comparable property using its assessed land value • A denotes the assessed value.

7. An Example of the Improved Net Rate Methodology

8. Estimation Errors In The Proposed Approach • “Within” estimation error due to the proposed estimation approach • Controlled and correctable • “Outside” estimation error due to the assessment errors in tax assessment • Non-controlled, but its impact is small when adding more sales.

9. The “Within” Estimation Error • ((β-1))/((γ*β(1+δ))/(α-(1+δ))+1), (8) • α= , the ratio of the jth (subject) property’s assessed land value to the ith (comparable) property’s assessed land value • β =, the ratio of the ith (comparable) property’s assessed land value to its market land value at time of sale • γ= , the ratio of the ith (comparable) property’s sale price to its assessed land value at time of sale • δ= , building structure adjustments in percentage between the subject property and comparable property

10. An Example Of Calculation α, β, γ, δ and The “Within” Estimation Error • The “within” estimation error is calculated at 0.3%, assuming δ=15%

11. The “Outside” Estimation Error • Due to assessment process and methods • Assessment errors are almost unavoidable, but systematic errors such as horizontal and vertical inequities are discouraged • Assessments must meet the minimum compliance requirements (e.g. the IAAO (1999) standard) • Empirical test show the systematic errors are small • Allen & Dare (2002); Cornia & Slade (2005); Goolsby (1997) • Clapp (1990); Sirmans, Diskin & Friday (1995); Cornia & Slade (2005) • Shi (2014) • It is arguable problems of assessment errors in assessed land values are likely to be smaller than assessed values in whole, due to • The Rich GIS information for land and neighbourhoods is ready to obtain • New sophisticated techniques for land valuations (e.g. Clapp (2003), Longhofer and Redfearn (2009), and Özdilek (2012).

12. Empirical Study Area

13. Summarised Statistics Of Dwelling Sales for Palmerston North city, March 2011 to February 2012

14. An Example of Calculated “Within” Estimation Errors

15. Theoretical Simulation Results of “Within” Estimation Errors

16. Theoretical Simulation Results Of “Outside” Estimation Errors

17. Empirical Simulation Results

18. Estimation Strategy

19. Conclusions • The method provides a very attractive solution to the traditional sales comparison approach when comparable sales are limited. • The impact of assessment errors is small and when more sales are added, the accuracy of valuation is improved. • The key assumption is that neighbourhood effects are capitalised into land assessments which are uniformly assessed in an urban residential area. • The method is easy to adopt in practice.