Ratio studies: level, COD and PRD
Ratio studies measure how close appraisals are to market value and how evenly they are spread across a group of properties. Ratio study questions appear in the appraisal part of the exam. The benchmarks below come from the IAAO Standard on Ratio Studies, the industry standard for this work, though it is not one of the four references PSI lists for the exam.
The three measures
| Statistic | What it tells you | How to compute it | IAAO standard |
|---|---|---|---|
| Median ratio | Level: are appraisals close to market value overall? | The middle appraisal ratio when the ratios are sorted. | 0.90 to 1.10 for any class of property, and each class within 5% of the overall level |
| COD | Uniformity: how tightly are the ratios grouped? | Average absolute difference from the median, divided by the median, times 100. | See the table below. Under 5.0 is suspect. |
| PRD | Vertical equity: are high- and low-value properties treated alike? | Mean ratio divided by weighted mean ratio. | 0.98 to 1.03 |
The weighted mean ratio is total appraised value divided by total sale price. A PRD above 1.03 points to regressivity, where higher-value properties are appraised at a lower share of their value than lower-value ones. Below 0.98 points to progressivity.
COD targets by property type
| Property type | COD should be between |
|---|---|
| Single-family, newer or fairly similar homes | 5.0 and 10.0 |
| Single-family, older or more varied areas | 5.0 and 15.0 |
| Income-producing property | 5.0 and 20.0 (5.0 and 15.0 in larger urban markets) |
| Vacant land | 5.0 and 20.0 |
A COD below 5.0 is usually a warning sign rather than a good result. IAAO says it may point to an unrepresentative sample or to sales chasing.
Worked example
| Sale | Appraised | Sale price | Ratio |
|---|---|---|---|
| 1 | $180,000 | $200,000 | 0.900 |
| 2 | $240,000 | $250,000 | 0.960 |
| 3 | $330,000 | $400,000 | 0.825 |
| Total | $750,000 | $850,000 |
- Median ratio: sorted, the ratios are 0.825, 0.900 and 0.960, so the median is 0.900.
- Mean ratio: (0.900 + 0.960 + 0.825) ÷ 3 = 0.895.
- Weighted mean: $750,000 ÷ $850,000 = 0.882.
- COD: the differences from the median are 0, 0.060 and 0.075, which average 0.045. Then 0.045 ÷ 0.900 × 100 = 5.0.
- PRD: 0.895 ÷ 0.882 = 1.01, inside the 0.98 to 1.03 range.
Three sales is far too few for a real study. The small sample just keeps the arithmetic easy to follow.
The Texas connection
Texas law uses the same idea in unequal appraisal appeals. Under Tax Code §42.26(a)(1), a district court grants relief if a property's appraisal ratio exceeds the median level of appraisal of a reasonable and representative sample of other properties by at least 10%. With a median level of 0.95, a property appraised at a ratio of 1.045 or more would qualify.
Try a question
Three sales have appraisal ratios of 0.900, 0.960 and 0.825. What is the median ratio?
- A0.895
- B0.900
- C0.882
- D0.960
Show the answer
B. 0.900
Sort the ratios: 0.825, 0.900, 0.960. The middle value, 0.900, is the median. 0.895 is the mean, and 0.882 would be a weighted mean ratio, which needs the appraised values and sale prices.
Texas License Prep is not affiliated with TDLR or PSI. This page is a study aid, not legal or tax advice. The official statutes and rules control.