Luc Hermans - Changes in the New Ratio Study Standard

The property assessment world runs on standards, not the glamorous kind that make headlines, but the bedrock principles that keep our profession honest and our communities fairly taxed. After 13 years, we're finally getting an updated ratio study standard from the IAAO, and it's bringing some significant changes to how we think about vertical equity.

I recently caught up with Luc Hermans, a data scientist with the Netherlands Council of Real Estate Valuation and one of the architects of the new standard. What struck me most about our conversation wasn't the technical improvements (though there are plenty), but the philosophical shift in how we approach the most vexing challenge in mass appraisal: ensuring properties across the value spectrum are assessed fairly.

Why Ratio Studies Matter More Than Ever

"This standard sets the minimum baseline of what we can and cannot do," Luc explained. It's a sobering reminder that while we deal in educated guesses, those guesses have real consequences for property owners and local governments alike.

The standard serves a dual purpose that often goes unappreciated: it protects taxpayers from being "screwed over by local governments, intentionally or not," while simultaneously shielding municipalities from "overly critical public that wants to go to court over maybe a dollar difference."

In an era of increasing scrutiny on government fairness and transparency, having clear, defensible standards isn't just good practice, it's essential for maintaining public trust.

The Vertical Equity Conundrum

For those newer to the profession, vertical equity is about ensuring properties across different value ranges are assessed at similar ratios to market value. It sounds simple until you try to measure it.

The old standard relied heavily on the PRD (Price-Related Differential) and PRB (Price-Related Bias) measures. The PRD dates back to 1957, practically ancient history in statistical terms. While straightforward to calculate, its limitations have become increasingly apparent. The PRB, championed in the 2013 standard, was supposed to be an improvement, but adoption tells a different story: only nine jurisdictions reported actually using it.

"Whichever measure you use, there will always be limitations," Luc noted, summarizing decades of research. "So you want to use multiple."

Enter the VEI: A Pragmatic Approach

The new Vertical Equity Indicator (VEI) represents a philosophical shift. Instead of chasing the perfect measure, the committee "picked the best pieces of all these measurements and welded them into one."

The VEI works by:

• Dividing properties into groups based on a market value proxy
• Calculating median ratios for each group
• Measuring the difference between the highest and lowest value groups
• Testing whether that difference is statistically significant

What I find most compelling is the emphasis on visualization. "It pushes you to visualize your ratios per deciles or quarters or halves," Luc explained. This isn't just about generating a number, it's about understanding what's happening across your entire property base.

The Challenge of Communication

Here's where things get real for practicing assessors. As I mentioned to Luc, explaining vertical equity to boards of review or equalization boards can be brutal. "People's eyes start glazing over," even when you're skilled at breaking down complex concepts.

The visual component of the VEI helps tremendously. People can see if assessments are "bending over", overvaluing properties on the low end while undervaluing those on the high end. It's intuitive in a way that PRD calculations never were.

But Luc made a crucial point: "Vertical equity is certainly the hardest part... it also gets, to be fair, a little bit dull." Yet it's "one of the most important things to think about because it coincides with the division of wealth."

Looking Ahead: Synthetic Wisdom

Perhaps the most forward-thinking aspect of the new standard is its treatment of independent value estimates, essentially using multiple assessment approaches to validate results. Luc calls this moving toward a "synthetic wisdom of the crowds."

"We know that regression is good enough. We know that AI can do wonderful things for us. We also know that whatever tomorrow brings might be even better," he said. "Choosing from one would just be a shame."

This resonates deeply with the reality of modern assessment offices juggling traditional CAMA systems, emerging AI tools, and everything in between.

The Implementation Timeline

The exposure draft is currently open for public comment through December 15, 2024. Depending on feedback, the new standard could be active by mid-2026 or early 2027. That might seem far off, but given this standard will likely guide our profession for the next decade, getting it right matters more than meeting an arbitrary deadline.

Key Takeaways

1. The new standard emphasizes understanding over compliance. The VEI's visualization requirements force us to truly examine our assessments, not just generate passing statistics.

2. Vertical equity remains our greatest technical and communication challenge. The new tools help, but we still need to get better at explaining why fair assessment across value ranges matters for community trust.

3. Multiple approaches are the future. Whether through independent value estimates or combining different models, the era of relying on single methodologies is ending.

4. The standard sets minimums, not best practices. Passing the VEI is "only your bare minimum. The real work starts after that."

As assessors, we operate at the intersection of mathematics, public policy, and community trust. The new ratio study standard acknowledges this complexity while providing clearer tools to navigate it. That's no small achievement.

The draft standard is available for review at iaao.org. I encourage everyone to provide feedback, especially if you see issues specific to your jurisdiction. This is our chance to shape the guidelines we'll live with for the next decade.