July 2009

Department of RevenueProperty Tax Division

Annual Revaluation Project Report

Recommendations for Developinga Sales Verification Process

P. O. Box 47471

Olympia, WA 98504-7471

Recommendations for Developing a Sales Verification Process

As part of its commitment to assist the assessment community, the Washington State Department of Revenue created the Annual Revaluation Project. The mission of this project is to provide guidance and assistance to help cyclical counties successfully prepare for and convert to annual revaluation. In addition, for those counties that are currently operating under an annual revaluation plan, this project will provide support and encourage them to strengthen their practices and methods.

As part of the project, our team has conducted interviews in several counties. An area some counties have requested assistance in is improving their sales verification process. We gathered information from several books and the International Association of Assessing Officers’ (IAAO) Assessment Standards. We interviewed many Washington counties regarding their practices and application of the sales verification process. We also obtained several surveys and other aids which can be found in the Appendix at the end of the report.

This report addresses the need for an accurate sales verification process, sales data sources, and collection of data, and provides attachments of several documents counties can use, modify, or combine as they develop their sales verification process. The attachments are useful aids for conducting a more efficient and accurate sales verification process.

For the purpose of this report, sales verification addresses verifying transaction details and property characteristics at the time of sale.

This report does not cover sales validation or the state sales ratio study. Sales validation is considered to mean validating sales for the state’s annual real property ratio study as described in WAC 458-53-070: Real property sales studies and WAC 458-53-080: Real property sales sample selection. For additional information on validation, please refer to Appendix A of the IAAO Standard on Ratio Studies 2007 and the Department’s Best Practice Report “County Sales Validation Process”.

As featured in the Best Practice Report, Pierce County has developed a Sales Validation Procedures Manual, Sales Validation Prescreening Process, and Exclusion Codes and Reasons document. They have also developed training questions and a sales validation training PowerPoint presentation geared to their software, Colorado Customware. Please contact Pierce County to request a copy. Kitsap County created a sales validation help file.

We would like to thank the participating counties for their willingness to share the information with the rest of the assessment community.

Why sales verification ? Sales data is essential for calibrating and specifying valuation models as well as developing sales ratio studies. The reliability of any ratio study or valuation model depends on the quality

and quantity of the data. Accurate land and improvement characteristics at the time of sale are required for proper comparison. It’s necessary because this is the data that adjustments (calibration) for individual characteristics are based on and it’s the basis for ratio studies and the market adjusted cost approach. Sales data needs to be accurate for proper model calibration and ratio studies. It increases accuracy in property valuation and equity in taxation of similar properties. In order to obtain valid measures of market value, sales data must be collected, analyzed, and adjusted. Bad sales data can skew trend results and ratios.

According to IAAO Standards on Mass Appraisal of Real Property, “Sales data are required in all applications of the sales comparison approach, in the development of market-based depreciation schedules in the cost approach, and in the derivation of capitalization rates or discount rates.” The IAAO Standard on Ratio Studies states, “The physical and legal characteristics of each property used in the ratio study must be the same as when sold. This implies two essential steps. First, the appraiser must ascertain whether the property descriptions match. Second, the appraiser must ascertain whether the property rights transferred, the permitted uses, and the physical characteristics of the property on the date of assessment are the same as those on the date of sale. If the physical characteristics of the property have changed since the last appraisal, adjustments may be necessary…” They wrote, “Specific information about the date, amount, terms, and conditions of a sale is required for proper analysis.” They went on to say, “Information on property characteristics is crucial for determining whether property that was assessed is essentially the same as when it was sold. Data for both sold and unsold properties should be current, relevant, and collected in a consistent manner.” They also stated, “Sales data are important in ratio studies and play a crucial role in any credible and efficient mass appraisal system.” Sales data is used to validate the valuation model used by the county. When property rights and characteristics at the time of sale are different than those recorded in the assessor’s records analysis will not be accurate. The actual characteristics at the time of sale should be included in the sales database and then frozen going forward. However, changes to the primary property record and assessed values must be in accordance with law, rules, and the county’s revaluation plan.

Sources of Sales Data Real estate transfer documents. Field Inspection. (See the Property Sale Field Assessment, # 2 in the Appendix.) Buyers and sellers, sales questionnaires, telephone interviews, personal interviews. The

IAAO Standard on Ratio Studies states, “Mailed sales questionnaires should be as concise as possible and should include; a postage paid return envelope, official stationary, purpose of the questionnaire, contact person, and authorized signature.” (See the attached surveys and letters, #s 3 - 8 in the Appendix.)

Third-party sources such as realtor’s Multiple Listing Service (MLS), brokers and agencies (including their websites), property flyers, aerial photos, government and private fee appraisers, appraisal organizations, title companies, financial institutions, leasing agents, certified property managers, and published commercial data.

Data collected should include Property characteristics at time of sale including quality and condition. Property segregations or multi-parcel sales. Property demolition, renovation, and/or additions. Full consideration involved (Sale price, Fee simple). Date of transfer. Instrument number. Time on market. Legal description, address, and parcel identifier. Names, addresses, phone numbers, and other contact information of buyer and seller.

Relationship of buyer and seller. Type of transfer and deed. Interest transferred. Type of financing. Personal property included.

Important considerations for developing a sales verification process Develop written procedures. (See attached samples, # 1 in the Appendix.) Have a sales database. (See attached samples, # 10 in the Appendix.) Freeze property characteristics at the time of sale in your sales database. Extreme outliers of sales price to assessed value ratios should not be the only sales

verified. Most sales are useable for the internal ratio studies (see attached samples, # 9 in the

appendix), sales comparison approach, income approach, market based cost approach, and model calibration, although some require adjustment. Adjustments include, but are not limited to, adjustments for time since sale date, financing, assumed leases, and personal property.

When the seller is a bank, verification is a must. This is especially true if the property had been foreclosed because many foreclosed properties have had some form of destruction by the departing residents or due to vandalism. Consideration should be given to whether the purchaser had knowledge of any property destruction and if it impacted the sale price.

Critical characteristics affecting value are often inside the home. Getting inside is usually necessary to observe deterioration or renovation impacting value.

Make sales surveys easy for the recipient to fill out and read. Some counties get a 60 percent response rate while others get just a couple of responses. Follow up with a phone call or inspection if the survey is not returned.

Link the sales database to the Geographic Information System for an additional analysis tool.

Keep memo comments in the computer assisted mass appraisal (CAMA) system documenting all sales checks.

Conduct routine sales clean-up. As part of Clark County’s process, they conduct sales cleanup once a month. They run a series of reports that looks for foreclosures, family sales, double sales, multi-parcel sales, and relocations. They look for discrepancies between frozen data and sales data. They sort by ratios, segregations, manual flags, and new construction.

Make sure terms of short sales are understood. If they are impacting the market, they should be given consideration for benchmarking.

Train staff to read and understand excise tax affidavits and other sales documentation. Read seller-carried contracts. Watch for clauses regarding growing crops (non taxable),

water rights, life estates in residence, or other elements that potentially influence sales.

ConclusionTo effectively and efficiently verify sales, a process with written procedures should be developed. Training should be included as part of the process. To help achieve uniformity and equity in taxation, it is essential to verify sales. Verification is necessary for meaningful ratio analysis, accurate sales comparison, development of trend factors, calibration of models, and adjustment of tables and schedules. According to the IAAO Standard on Ratio Studies, “The usefulness of sales data is directly related to the completeness and accuracy of the data. Sales data should be routinely confirmed or verified.” Unverified sales can lead to input of poor quality data which adversely impacts every step of the valuation process and prevents the attainment of uniform and equitable assessments.

Bibliography

Gloudemans, Robert J. 1999. Mass Appraisal of Real Property. Chicago: International Association of Assessing Officers.

International Association of Assessing Officers (IAAO). 1990. Property Appraisal and Assessment Administration. Chicago: IAAO.

International Association of Assessing Officers (IAAO). 2002. Standard on Mass Appraisal of Real Property. Chicago: IAAO.

International Association of Assessing Officers (IAAO). 2007. Standard on Ratio Studies. Chicago: IAAO.

University of British Columbia. Real Estate Division. 2003. Real Property Assessment. BC, Canada: UBC Real Estate Division.

Appendix

Documents to aid in the sales verification process

1) Thurston County’s Sales Verification Process with Sales Verification Codes, and two Field Sales Review Checklists from Snohomish County. (These are summaries of procedures used in the field.) Thurston County:

Snohomish County:

2) A Property Sale Field Assessment. This was modified from a document from Lewis County that they use on tablets they take in the field. They have it set up to automatically populate existing property characteristics and have set up drop-down menus for many of the questions. I converted it to a hard copy format and eliminated most of the formatting so it could be easily modified. Right now it includes several property types, but it can be broken out into a separate document for each property type.

3) Four templates of surveys modified from Pierce County. They include the introductory letter at the beginning of the survey. Some counties separate the introduction and survey into two different pages. There are different placements of headings and addresses. A preset

heading format can be substituted. The formatting was kept simple for easy modification. For copies of the originals, please contact Pierce County directly. Residential Sales Survey:

Condo Sales Survey:

Commercial Sales Survey:

Vacant Land Sales Survey:

4) Residential Sales Surveys from Clallam, Ferry, Kitsap, Snohomish, and Thurston counties. The Kitsap and Thurston County surveys were copied from pdf files so they cannot be modified from the attached copy. Clallam:

Ferry:

Kitsap:

Snohomish:

Thurston:

5) Introductory Letters that go with the Residential Sales Surveys for Clallam, Ferry, Kitsap, and Thurston counties. (Snohomish County had their introduction at the beginning of their survey.)

Clallam:

Ferry:

Kitsap:

Thurston:

6) Commercial Sales Surveys and their accompanying letters for Kitsap and Thurston Counties. Thurston County’s survey includes several income verification pages for a variety of property types. Kitsap:

Thurston:

7) A Duplex-Triplex survey from Snohomish County:

8) A Farm Sales Survey from Franklin County.

9) For examples of ways to look at sales analysis, Franklin County sent us a Sales Statistics Report of one neighborhood and a Sales Ratio Map.

Sales Statistics:

Ratio Map:

10) Samples of Sales Database/Analysis. These show the different fields included in their analysis. The Snohomish County spreadsheet has ratio analysis by specific property characteristics on the Pivot sheet. The databases have been edited to minimize sales shown and remove personal data relating to the property. Clallam:

Ferry:

Franklin:

Grays Harbor:

Kitsap:

Snohomish: