Sales Ratio
In Iowa, residential and commercial property is assessed at 100 percent market value. Therefore, sale prices and
assessed values must stay in sync. If the median assessment to sale price ratio (e.g. assessments divided by sale prices)
in any given area deviates from the statutory 100 percent level by a difference of more than plus or minus 5 percent, the
Iowa Department of Revenue steps in and mandates an across the board adjustment to bring things back into compliance.
This is called equalization, and is generally not a good thing because it means all property values are affected,
when usually only some are causing the problem.
Arms length transaction
- A sale between two unrelated parties, both seeking to maximize their positions from the transaction
Sales ratio
- Sales Ratio = Assessed Value of the property / Sale Price of the property
Ratio Study Statistics
Ratio study statistics provide concise, formal measures of appraisal performance and often constitute the primary basis for reappraisal or equalization decisions.
Sampling
Sampling is the foundation on which a ratio study is built. Statistics calculated in the ratio study are used to draw conclusions based
on information contained in a sample, about a population of properties.
Population
- Consist of all parcels in the area under analysis
Arrays
- Listing of ratios from lowest to highest
- Arrays are used to compute the range, median, and quartiles of ratio data
- Quartiles divide the data into four equal parts
- Arrays help identify outliers (unusually large or small ratios) which may be associated with invalid sales that distort ratio study results
Frequency Distributions
- Reveals trends or patterns that might be missed in viewing a large array and provide information about appraisal performance
Measures of Appraisal Level
Measures of central tendency are used to estimate the overall appraisal level at which property is assessed.
Mean ratio (average)
- Average obtained by adding all the ratios and dividing the number of ratios
Median ratio (middle value)
- Middle ratio when they are arrayed from lowest to highest
- Less affected by extreme ratios
- Generally preferred measure of central tendency for direct equalization, monitoring appraisal performance,
determining reappraisal priorities, or evaluating the need for a reappraisal
Weighted mean ratio
- Sum of assessments divided by sum of sale prices
Measures of Appraisal Uniformity
Measures of dispersion are used to measure appraisal uniformity.
Coefficient of Dispersion (COD)
Measures the average percentage individual ratios vary from the median ratio
- Low COD indicates appraisals in area or class are uniform
- High COD indicates properties appraised at inconsistent percentages of market value
- COD of 10.0 means properties are, on average, appraised within 10% of the median assessment level
Price related differential (PRD)
Ratio of the mean ratio to the weighted mean ratio
Indicates whether low- and high- value properties are assessed at the same level
- If exceeds 1.03 suggest high-value properties are relatively under valued
- If under .98 indicates low-value properties are relatively under valued
Sales Ratio Performance Standards
The Standard on Ratio Studies, published by the International Association of Assessing Officers (IAAO),
has suggested sales ratio performance standards for jurisdictions, in which current market value is the legal basis for assessment.
In general, when these standards are not met, reappraisal or other corrective measures should be taken.
Sales Ratio Performance Standards for Single Family Residential Property |
Type |
Measure of Central Tendency |
COD |
PRD |
Newer, more homogenous areas |
0.09 to 1.10 |
5.0 to 10.0 |
.98 to 1.03 |
Older, heterogeneous areas |
0.09 to 1.10 |
5.0 to 15.0 |
.98 to 1.03 |
Rural residential and seasonal |
0.09 to 1.10 |
5.0 to 20.0 |
.98 to 1.03 |
Three step process
- Review all property sales within a jurisdiction and eliminate those that likely do not represent a full and fair "arms-length" transaction
- For example, contract sales, foreclosures and intra-family sales might not have occurred in a fair market value and would skew median sales prices
- For the remaining transactions, a sales ratio is calculated. This is merely the result of dividing the current assessment by the sale price.
- A property assessed at $80,000 that sold for $100,000 would have a ratio of .80
- A property assessed at $125,000 that sold for $100,000 would have a ratio of 1.25
- Finally, all sales ratios are ranked from lowest to highest, in order to find the middle or median ratio.
- If the median is above 1.00, it indicates the assessments are high, relative to the market
- If the median is below 1.00, it indicates properties are generally selling for more than the assessment