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Market Condition Adjustments (“The Time Adjustment Factor”) (April-2018)
Real estate practitioners know when the sale prices for properties are changing by observing particular occurrences in the marketplace. They notice price decreases when demand drops off, inventories increase, and sellers reduce asking prices. These experts also see price increases as demand picks up, inventories decrease, sellers ask more for properties, and multiple offers are received from potential buyers. These actions establish market patterns that occasionally result in a time adjustment which plays an important part in assessment sales ratio studies and the valuation of properties.
What is a time adjustment?
It is a market condition adjustment that reflects price level changes over a period of time. This adjustment is an essential component of the assessment sales ratio study used to control the impact of market conditions for property assessment purposes. The time adjustment helps determine what a sale price would be if it occurred at the same point in time as the date of appraisal. It allows for a more accurate measurement of a county’s assessment level because the adjusted sale price and estimated market value used to calculate the final ratio are aligned with the assessment date, January 2nd.
A time adjustment is best explained by this example: A property sold for $100,000 twenty months ago. This same property resold today for $120,000 without any physical changes, renovation, or remodeling. The price change indicates the property appreciated or increased by 20% ($20,000/$100,000) or say, 1% per month (20%/20 months) between the original sale date and the most recent sale date. This simple calculation produced a time adjustment factor of 12% per annum (1% x 12 months). When other repeat sales are considered and similar indices are produced, trends emerge pointing to the price level changes for a particular market segment and a time adjustment factor is identified.
The following example demonstrates the time adjustment calculations performed to adjust a sale price forward to January 2, 2018 for assessment sales ratio studies: A property sold for $100,000 in October 2016. The monthly growth rate for residential/seasonal recreational residential properties in the region was 6% per annum or say, 0.5% per month. To adjust the sale forward 15 months, a time adjustment factor of 7.5% (0.5% per month x 15 months) is applied to the sale price. $100,000 x 7.5% = $7,500 (price appreciation). $100,000 + $7,500 = $107,500 (adjusted sale price). After this adjustment, the adjusted sale price of $107,500 is used to evaluate the quality of the assessment without a bias from market trends by comparing it to the 2018 assessor’s estimated market value. If the current property assessment is $97,000, then the time adjusted sales ratio is 90.2% ($97,000/$107,500). Using the same property assessment with an unadjusted sale prices, the sales ratio is 97.0% ($97,000/$100,000). The latter measurement does not reflect the final ratio at the same point in time. It only reflects a measurement based on the sale date and fails to reflect the rate of change based on prevailing market conditions.
Why is a time adjustment used?
A time adjustment is necessary if the rate of change in real estate prices paid varies by property type and location. The Minnesota Department of Revenue annually determines if there are any market condition trends occurring within five major property classes --- agriculture/rural, apartments, commercial, industrial, and the residential/seasonal recreational residential properties--- within counties and certain regions of the state. A ratio trending procedure is applied over a 21-month study period (January 2016 through September 2017 is used for the 2017 Study) to determine if there is a systematic and consistent price-level change. If there is evidence of a market trend, sale prices are adjusted by property type and geographic area for assessment sales ratio study purposes.
What method is used to calculate a time adjustment for assessment sales ratio study purposes?
The International Association of Assessing Officers recommend five methods for calculating a time adjustment. These methods include: (1) paired sales analysis, (2) resale analysis, (3) sales ratio time trend analysis, (4) multiple regression analysis, and (5) comparing per unit values over time. Some of these techniques require extensive sale and parcel data which is more than the Minnesota Department of Revenue collects. Other procedures require a high volume of sales and repeat sales. The accepted practice consistently applied throughout the state is the sales ratio time trend method. It is based upon observations made about changes in market conditions created by changes in sale prices over time.
How is the sales ratio time trend method used to calculate a time adjustment?
To determine if prices actually changed over time, only sales identified as good open, market transactions are used to determine the time adjustment. The inverted sales ratio (sale price/assessor’s estimated market value) is the standard used to compare properties by controlling individual characteristics of the property. For example, a home that sold for $250,000 can be compared to a newer neighboring home that sold for a higher price. The house that sold for $250,000 likely has a lower estimated market value than the house that sold for a higher price. While the prices paid for the two homes are different, the inverted ratios allow for a direct comparison that isolates the effect of the prices assuming the current property assessment is both uniform and acceptable. By including ratios of similar sale properties in the trend analysis, a regression equation is run to find any market condition trends. An increase in the inverse sales ratio over time indicates an increase in sale prices, and a decrease in the ratio relates to a decrease in sale prices relative to the assessor’s estimated market value on or after a fixed date.
How are market condition trends applied to the property assessment?
Sales are stratified by property type. Time adjustments for residential/seasonal recreational properties are calculated at the county level or at the city level for cities with a sales volume of 100 or more sales. The time adjustment for agriculture/rural, apartments, commercial, and industrial properties are calculated in regional groupings including other counties. Once the regression is performed on the property grouping and study area, the time adjustment must be statistically significant having a 95% confidence level or more before it is applied. There must be a minimum of 30 sales for a trend calculation to have confidence that the results are valid. If the Minnesota Department of Revenue cannot determine a market condition trend, it does not necessarily mean that prices are not changing. Instead, it often means that the price-level changes were not significant and/or the number of sales was not sufficient to support the regression analysis.
Does a time adjustment factor dictate how a county should change its values for the next property assessment?
No, the time adjustment provides a general overview of the market conditions over a 21-month period. It does not mean that the county must raise or lower values countywide. The county will likely stratify sales to determine which types of property sold within the property grouping. The county will examine the location of these sale properties, when they sold, and what their ratios were at the time of sale. Information gathered and analyzed from these sales will help determine how much values should change in the next property assessment.
What time adjustment factors were applied to the 2017 assessment sales ratio studies for Stearns County?
Time adjustment factors are applied by property type and geographic area within the county --- Eastern and Western Stearns County. Cities located in two counties and/or having more than 100 sales have separate adjustments. A time adjustment was not reported or used on the 2017 agriculture/rural vacant land, apartment, commercial, and industrial property sales. A +8.77% time adjustment was applied to off-water residential/seasonal recreational sales in western Stearns while a +7.08% time adjustment was used on sales in eastern Stearns. The on-water residential/seasonal recreational sales in western Stearns were adjusted +5.83% for time and in eastern Stearns, a +6.63 percent time adjustment was applied to this grouping. The time adjustment for the residential/seasonal recreational aggregation for Eden Valley City was +10.80%. For Sartell City, the on-water residential/seasonal recreational sales were adjusted +6.63% and the off-water sale properties had a +5.71% time adjustment.
If you have any questions regarding this information or topic suggestions for a future column, please contact us.
Stearns County Assessor's Office
Administration Center, Room 37
705 Courthouse Square
St. Cloud MN 56303
320.656.3680
or e-mail the Assessor: jeff.johnson@co.stearns.mn.us
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