Saturday, March 31, 2018

First-time Homebuyers Must Start Research at a Top-down Valuation Site

(Click on the image to enlarge)

A Top-down home valuation site is one that allows users to work up the value of a "simulated" home without having to deal with a series of random comps. A good Top-down site generally offers the following features:

1. Sub-markets: All (socio-economically) prominent sub-markets within the market (say, Orlando) are generally supported, allowing users to toggle between sub-markets to evaluate and understand the variations in home values.

2. Home Type and Style: Home types (Detached, Attached, HOA, Townhouse, Condo, etc.) and styles (Ranch, Cape, Colonial, Conventional, Contemporary, Tudor, etc.) are important considerations for home-buyers so a good Top-down site incorporates them.

3. Location: A good school district tends to fetch a higher value than its counterparts with lesser known schools. Good sites therefore allow users to understand how such qualitative factors quantitatively contribute to the home value.

4. land and Building Sizes: Users are allowed to educate themselves how the changes (increase/decrease) in sizes impact values within a given sub-market. Some sites would allow users to further differentiate between total improved area and heated area, corner lot vs. non-corner, etc. Bath count is also an important consideration as it helps understand if the home is optimized or a lifestyle one.

5. Building Age and Condition: Users can quickly learn how age and overall condition (including quality of rehab) impact values in a sub-market. Some sites might combine these two variables into one called effective age. Either way, these are important considerations in pre-owned homes.

6. View: A waterfront home could fetch significantly higher value than a non-waterfront one within the same sub-market. Similarly, a house with other enhancing views (park, bridge, skyline, golf course, etc.) could be pricier.

7. Amenities: Central A/C, In-ground Pool, Upgraded Porch, Tennis/Basketball Court, etc. often add value to homes so a good site would allow users to experiment with such options as well. 

Case Study

Our First-time Homebuyer = John Doe

John must be methodical in his research leading to the home buying. After a pre-qual of $300K, he has decided to focus on two Orlando-area sub-markets: Maitland and Winter Park. 

He finds a Top-down site which allows him to perform his research without having to work up some random comps. He realizes that while Winter Park has beautiful tree-lined streets, he gets more modern and slightly bigger homes in Maitland (a screened-in Pool could be a bonus). He is very happy that the site allows him to evaluate numerous possible combinations including location, type, size, style, amenities and view. He also notices that the site meaningfully curves values as home size increases.

I picked the above graphics from as I own and operate it, to avoid having to deal with any copyright issues. My Homeyada site is Mobile-friendly (no separate apps are needed), totally self-directed (no modeled values), totally free (no strings), and requires no login or registrations whatsoever. It has a built-in non-linear value curve/scale tied to the home size, as well. Anyway, please use the site/system that works best for you.

Thursday, March 29, 2018

Wednesday, March 28, 2018

Should the Taxable Status Date be Forward or Backward?

While most property assessment experts are wrestling with the frequency of the assessment cycle, meaning whether properties should be assessed annually or every three years, etc., I have a completely different perspective on this issue.

Proper market information and data hold the key to produce a fair and equitable roll. The real estate market, like the stock market, has become extremely volatile (rises fast or declines fast), making it increasingly difficult to produce a futuristic roll with the backward-bending market data. Since the Taxable Status Date (or the Valuation date) is generally a futuristic date, the available market information and data tend to be quite inadequate to develop proper predictive (mass appraisal) models that, in turn, generate the assessment roll. Case in point: many taxing jurisdictions utilizing mass appraisal modeling generally build their models in August and September with the available data, targeting the next January as the status date (assuming the valuation and status dates are the same). At that point, because of the usual 3-month lag in recording and validation of sales, the most recent sales in the modeling data-set would cover, at best, June-July, leaving an enormous predictive gap of at least six months. Worse yet, a vast majority of those arm’s length sales would have been contracted in the first and early second quarter of the year, leaving a small percentage of the questionable investor/distressed cash sales to represent the recent state of the market.

With a market as volatile as this, and considering the structural shift to higher risk-taking resulting in continued higher volatility going forward, those futuristic rolls are tantamount to crapshoots in the name of mass appraisal modeling. Granted, today we have more mass appraisal experts all around the world, thanks to organizations like IAAO, as well as more advanced econometric and operations research techniques, but the higher modeling expertise and advanced techniques could not be the proxy for the lack of market data around the status date. Simply put, nobody has the crystal ball in simulating a volatile market six months in advance. That experimentation would be okay to write a thought-provoking paper or article, but is totally unacceptable to experiment with an assessment roll involving most taxpayers’ biggest financial investment.

Again, the only way we can achieve the goal of a fair and equitable roll under the changing market conditions (let's face it, market volatility is here to stay) is if we move away from the predictive mode and settle for a known event. The guesswork in the name of predictive modeling (most modelers understand the MRA process, but do not understand the advanced Time Series modeling) forces modelers as well as the management to undertake a gigantic gamble to predict out values 2 to 3 quarters later.

After having spent, off and on, twenty-five+ years in automated valuation modeling and mass appraisal, I have come to the conclusion that the dialogue should be about the taxable status “date” – should it be a forward date or a backward date? I am of the opinion that it should be a backward date so we do not succumb to the void created by the lack of market data. The CAMA/AVM modelers must have the necessary data, adequately covering the status/valuation date, under their belts before they even get started with the modeling process. This lag would also allow the field staff ample time to inspect all sales (and related permits) ahead of the modeling season. Thus, the modelers would have access to all of the valid sales (preferably inspected) for the allowable period. Modeling, therefore, would not be a predictive game anymore, eliminating the need for any futuristic gamble whatsoever. 

In other words, I am trying to reinvent here the combined benefits of David Ricardo’s 200-year old theory of comparative advantage and Laureate Joseph Stiglitz’s theory of markets with asymmetric information. In terms of market information, jurisdictions with futuristic status/valuation dates have an inherent comparative disadvantage vis-à-vis their counterparties.

Needless to say, this concept will also help dismantle the oligopolistic stronghold of the few law firms, paving the way for a significantly reduced volume of assessment appeals. Furthermore, we will not lose sleep worrying over how we could ever justify the drastically lower COD’s for the modeled sale periods in relation to the subsequent periods within the same assessment cycle. This would also minimize the need for any annual sales ratio/equalization study. I do, however, understand the short-term statutory and logistical issues, but then again, we owe our taxpayers a fair and equitable tax roll.

At the end of the day, do taxpayers really care if the status date is 01-2018 or 01-2019? Honestly, most taxpayers have no clue what that even means. All they are interested in is a value truly reflective of the market (which is where Assessment comes in). If we are capable of delivering that, we will have achieved our goal. Eventually the protests would be reduced to err in data only, removing the need for the mass (appeal) filers from the system, altogether. The concept of refund liability would be a thing of the past.

--by Sid Som, MBA, MIM
Copyrighted Material

Tuesday, March 27, 2018

These 9 Enhancements will Make Existing Property Assessment Fair and Equitable

9 Enhancements

1. Backward-bending Status/Valuation DateSince the Taxable Status Date (or the Valuation date) is generally a futuristic date, the available market information and data tend to be quite inadequate to develop proper predictive (mass appraisal) models that, in turn, generate the assessment roll. Case in point: Many taxing jurisdictions utilizing CAMA (mass appraisal) modeling generally build their models in August/September with the available data, targeting the next January as the status date, creating an enormous predictive (data) gap. FYI - A vast majority of those modelable sales would have been contracted in the first and early second quarter of the year (the gap is actually more dire!). We, therefore, need to set the status/valuation date back in line with the availability of the modelable data, to avoid having to produce (or gamble with) a futuristic roll. 

Here is the Published Paper on this topic

2. Short-term Sales: When the holding period of the property is less than 2 years, those sale prices must be anchored as market values, thus forcing the potential gamers (institutions, flippers, etc.) to pay higher taxes. The point is, the rapid institutionalization of the housing market needs to be evaluated separately, to avoid having to redistribute their share (of the burden) on to the rest. Assessors must therefore aggressively lobby to remove the application of any state/charter restrictions (e.g., annual growth capped at 5%, etc.) from short-term sales so they stand on their own at the market level, without any pseudo protection. Exclusion: non-arms length sales (inter company, distressed, etc.).

3. AVM Application: Since Automated Valuation Modeling (AVM is a top-down econometric solution encompassing the vast majority of residential properties on the roll) is inherently more equitable, it must be applied on to the rest of the roll, including the non-arms length from #1. Exclusion: Unique properties.

4. Unique Properties: AVM is not meant for this group (trophies, large waterfronts, tiny oceanfront bungalows, etc.) so they must be hand-worked by the assessing staff. Obviously, the sale of unique or vastly atypical properties must not enter the modeling (AVM) sales sample, either.

5. Outsource AVM: It’s much cheaper to outsource residential AVMs to an economic consulting/research firm (not appraisal) than maintaining a dedicated group in-house modelers. It’s also more effective because they would be non-political and be judged by an important metric: appeals %.

6. 2-to-4 Family Properties: Considering these are income-producing properties, they must not co-share the SFR roll. They must be modeled, valued and taxed as a separate group or as a sub-group (small cap) under the multifamily.

7. Manpower Planning: Larger jurisdictions must learn from the private (FedEx, UPS, Amazon, etc.) how to use the seasonal help. For example, the seasonal help could be used to process exemptions, appeals applications, income/expense statements, etc. They can be used to perform field operations and inspections too. Alternatively, counties/taxing jurisdictions may maintain a “Central Pool” agency to cater to the different agencies based on their seasonal manpower requirements. 

8. Practice Assessment: Instead of having an autonomous appeals/review department, it's better to have it under the Assessment umbrella. Having a separate government agency or department is inherently political and is not necessarily in the best interest of the taxpayers. Often, the focus of the autonomous appeals/review is to hire appraisers, rather than assessors, which does not promote equity of the roll. 

9. Commercial Assessment: In order to promote equity of the commercial segment of the tax roll, departments must practice assessment, not appraisal. It's therefore prudent to collect a sizeable Income and Expense (I/E) sample to develop meaningful local metrics for the commercial properties. In fact, I/Es could be used to develop Use-based AVMs to process the homogeneous properties, generally one sigma under the bell curve.  Commercial Assessors must also be groomed internally.  

Flood Zone Insurance: Last but not least, enforce flood zone insurance. Homeowners inside the designated flood zones must carry flood zone insurance. Should the situation arise, insurance companies would be on the hooks, not the rest of the taxpayers. Of course, an annual credit could be offered to offset a minimum policy deductible.  

Again, having an all-encompassing residential AVM does not make the roll fair and equitable; it must be properly sourced and targeted. Likewise, training and promoting a group of non-quant employees as AVM techs does true injustice to the roll. Finally, use-based Income AVMs could promote equity across the homogeneous stretch of commercial property groups.

Monday, March 26, 2018

9 Issues that make an AVM inefficient, often ineffective

Inefficient or Ineffective AVM

1.Time Adjustment: Some practitioners use Number of Months since Sale (NMSS) as an independent variable to ascertain the rate of growth (+/-) in the targeted price level (aka, time coefficient). While this is acceptable as a lead-up regression to generate the time-adjusted sale price (primary dependent variable), it is however unacceptable as an independent variable going into the valuation regression. The reason is simple: since NMSS would be missing in the unsold population (the model would be applied to), the application would fail. Ineffective modeling.

2. Sales GIS: Testing the representativeness of the Sales GIS is not an easy proposition, forcing many practitioners to skip this sampling test. Sales GIS is often a function of market dynamics, deviating from the Pop GIS. Therefore, an untested Sales GIS paves the way for an inefficient AVM. That is why many practitioners tend to use “fixed neighborhoods” in the modeling process as they are more stable (do not succumb to short-term market swings) and established (generally liquid enough to test sample’s representativeness). Inefficient modeling.

3. Chasing Trophies: An AVM is not meant for the entire population. Trying to achieve a two sigma solution (95%) is more meaningful, leaving out the admixture of the unattainable 5% including the limited trophy properties. It is therefore advisable to leave out those properties from the modeling spectrum. Inefficient modeling.

4. Chasing Tiny Bungalows: The flip-side of trophies. Especially the waterfront ones (primarily land value). Inefficient modeling.

5. Combining 2, 3 and 4-Family with SFRs: Modeling 2+ (mostly income-producing) with SFRs is not prudent, even if they are part of the same tax class or mortgage category. Mother-daughter set-up is not a technical 2-family so they could be modeled with SFRs. Inefficient modeling.

6. Synthetic Variables: Synthetic variables like (X * Y) ^ Z may enhance model’s favorable stats but reduces its explainability and decomposability, and therefore overall utility! Inefficient modeling.

7. Untested Models: It's always a good practice to test the model on to a mutually exclusive holdout sample before being applied on to the population. Holdout test must produce very similar results, both before and after the outliers. Inefficient modeling.

8. Sales Complex: Sales complex, directly or indirectly (SP/SF, etc.), must not be used as regressors as it violates the basic regression assumptions. Ineffective modeling.

9. Lack of Value Optimization: Since the error-baed (generally COD-based) regression models do not test the true optimality of the solution (is COD of 8 better than COD of 10?), final regression values need to be optimized via Linear/Non-linear Programming. Inefficient modeling.

LINK to our trend-setting book on AVM (Kindle or Parperback on Amazon)

Thursday, March 22, 2018 Offers Automated Valuation Modeling for Office Properties (O-AVM)

Homequant Offers QA/Review (back-end) AVM for SFR to 4-family Homes (Q-AVM)

Wednesday, March 21, 2018

Homequant Offers Market AVM and Market CAMA Modeling (M-AVM)

Homequant Offers Benchmark Automated Valuation Modeling (B-AVM)

Thursday, March 15, 2018

A Ratio-based Spatial Graphic is a Good Starting Point to Analyze Assessment Equity

(Click on the image to enlarge)

Since the Median Countywide Sales Ratio points to a ratio of .80, all Towns in this County must be valued close to this ratio (assuming, of course, a countywide uniform assessment statute) so that the Assessment Roll becomes fair and equitable.

While one would expect to see all Blue and Green balloons (legends on top right) on the spatial chart above, many Red and Yellow ones - even side by side - exist, indicating the presence of some seemingly serious under and over-assessed parcels. This scenario is quite normal as - more often than not - similar properties in the same neighborhood do not necessarily sell for the same price, which, in turn, introduces (visual) conflicts amongst individual ratios.

That is why Town-wise statistical summaries are always better front-line indicators. Of course, if an arms-length subject sale significantly deviates from its Town's, it may require a re-examination.    

Obviously, sales must be individually validated and the outliers removed from the sales universe. Better yet, those sales should then be modeled (AVM applied) and the resulting model-defined outliers removed as well, thus paving the way for a more scientific universe of ratio-eligible sales.

I picked the above graphic from as I own and operate it, to avoid having to deal with any copyright issues. My TownAnalyst site is totally free (no strings) and requires no login or registration whatsoever. Please use the assessment evaluation system that works best for you.

Disclaimer: This analysis is strictly illustrative. Any commercial or legal use of it is totally prohibited. Always consult a Tax Attorney on statutory requirements.