Sunday, June 24, 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
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