September 17, 2013


Hatteras Island Real Estate: What is a property worth?

By TOM HRANICKA


At some point in a real estate transaction, it seems like everyone wants to know the value of a property.  Owners want to be sure that they are receiving full value for the properties that they are selling.  Buyers are concerned that they are paying fair prices for the properties they are purchasing, and lenders want some assurance that the loans they are making are backed by realistic property values.  The central question for each of these stakeholders is the same – “What is the value of this property?”  The answer can be both simple and complex.  To quote the attorneys’ familiar refrain, “It all depends!”

In a very real sense, it all depends on what type of valuation is being requested, who is performing the evaluation, and when the analysis was completed.  The estimate of value may differ depending on whether we are talking about appraised value, probable sale price value, assessed value, or fair market value. This is an especially challenging time for property valuations since the real estate market on the island is in transition from a buyer’s market to a seller’s market, and market indicators are sometimes sending mixed signals.

In recent years, we have seen the emergence of Internet-based estimates of value on websites, such as Zillow, Trulia, Yahoo Homes, and Realtor.com. Perhaps the most widely known of these is the “Zestimate” by Zillow.

With the possible exceptions of assessed values and Internet values, the valuation figures from each type of analysis will generally be fairly close to each other.   Let’s take a look at each of these measures.

Appraisal

Under the North Carolina Appraisers Act, a real estate appraisal is any analysis, opinion, or conclusion as to the value of an identified parcel of real property when performed for compensation.  The statute requires that all persons who act as real estate appraisers or hold themselves out to be appraisers must be licensed or certified by the state Appraisal Board. 

Basically, an appraisal is an expert opinion about the value of a property, with emphasis on the word opinion.  For example, in certain legal proceedings, appraisals by three separate appraisers may be required to establish value, suggesting that no single appraisal is taken as definitive statement of value.  The appraisal process is often broader than an analysis of value prepared by a real estate broker, since appraisers have established standards and parameters for their valuation methodology.  In addition, an appraisal considers factors beyond the selling prices of similar properties.

Two of the methods that appraisers use to further evaluate a property’s value are the income approach and the cost approach.  The income approach is a basic method for estimating the value of properties with a stream of income, i.e. investment properties.  The cost approach is an estimate of value that seeks to determine what it would cost to replace the building, reducing this value for depreciation, and finally, adding in the value of the land. 

Appraisals can be used for a variety of purposes.  Property owners may obtain an appraisal prior to listing their properties for sale in order to determine a reasonable asking price.  Lenders require appraisals to substantiate the value of the property on which a loan is being made.  Courts and attorneys request appraisals for such things as property settlements and estate valuations.  The cost of a typical residential appraisal can range from $400 to $500 or more depending on the size and complexity of the property being evaluated.

Comparative Market Analysis

Real estate brokers are often asked to assist buyers, sellers, and others in determining the probable sale prices of parcels of real property.  This type of analysis is called a comparative market analysis, a probable sale price analysis, or a broker price opinion. A broker price opinion is essentially a comparative market analysis if it is based on recent sales of comparable properties.

North Carolina law defines a comparative market analysis as an analysis of sales of similar recently sold properties, performed by a real estate broker, to get an indication of the probable sale price of a particular property.  In reality, when real estate brokers perform analyses to estimate the probable sale prices of properties, they may also take into consideration the prices of similar properties that are for sale, under contract, or recently expired, as well as market trends and construction costs.

While a fee can be charged by a broker for a comparative market analysis, in most instances, there is usually no charge to current or prospective clients.  It is important to note that comparative market analyses may not be performed for lending purposes.  A formal appraisal is required for lending situations.

Comparative market analyses are typically performed by real estate brokers to help sellers  establish competitive listing prices for properties that they are selling and to provide guidance for buyers in their negotiations for the purchase of properties.  Homeowners may also turn to their real estate broker when they are checking to see if their insurance coverage reflects current market values and to determine how assessed values compare with probable sale prices.

Assessment

Assessed value is defined as the official appraised value of a property for ad valorem tax (property tax) purposes.  State law establishes standards for real property taxation, assessments and appraisals.  In North Carolina this legislation has the colorful name of “The Machinery Act.” 

To determine values for taxation, the law requires that real property be reappraised at least every eight years, but counties have the discretion to conduct the revaluation more frequently.  In Dare County, the most recent reappraisal of property took place this year. It is my understanding that some counties have chosen to revalue properties as frequently as every four years.

Once properties in the county have been reappraised, the value that has been established generally remains unchanged until the next revaluation is completed.  Exceptions to this guideline might include the correction of errors in the original appraisal, changes to land such as subdivision or erosion, additions to existing houses, or the construction of a new house on land that was unimproved at the time the revaluation took place.  In these cases, the appraisal would be adjusted to reflect the change, and a new appraised value would be established.

Real property is assessed at 100% of the fair market value determined as of Jan. 1 – the effective date of the revaluation.  One misconception relative to assessed values is the
belief that the valuation methodology used by county appraisers is the same as analytical procedures used by real estate agents to determine probable sale prices or by real estate appraisers to establish market values for loan purposes. 

In reality, the county’s methods are somewhat similar, but not identical.  Without getting into the details, the county appraisers use a broad-based approach that includes a construction cost study, a depreciation study, and a land analysis.  As part of their research, they conduct a detailed neighborhood-by-neighborhood analysis, and they physically make two visits to each property.  In addition, while real estate brokers and appraisers usually evaluate a limited number of properties in relation to the home or lot being analyzed, in the revaluation process the county is evaluating approximately 43,000 properties including vacant lots, houses, condominiums, and commercial parcels.

One observation that needs to be made is that whether we are discussing an appraisal, a comparative market analysis, or an assessment, the stated value is only valid for a relatively short period of time after the valuation is completed.  For example, if the county appraisal for the 2013 revaluation was actually completed in 2012, it would not be reasonable to expect that the assessed value for tax purposes necessarily equals to the current value of the property in the fall of 2013.  Market conditions are almost always in a state of change.

Internet-based Estimates of Value

As noted above, Zillow is one of the most popular Internet-based sources of property values. According to one source, “Zillow.com is an online real estate database…The website uses a proprietary algorithm called the ‘Zestimate.’”

Zillow’s website states,“The Zestimate®… home valuation is Zillow's estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home's value. The Zestimate is calculated from public and user submitted data.”  Zillow encourages buyers, sellers, and homeowners to supplement the Zestimate by doing other research such as getting a comparative market analysis from a real estate agent or an appraisal from a professional appraiser.

A question that frequently arises is, “How accurate are Zestimates?” According to Zillow’s own Data Coverage and Zestimate Accuracy chart for Dare County, they give their data only two stars out of a possible five star rating system. They further indicate that only about 20 percent of their Zestimates are within 5 percent of the actual sale price, and almost a third are within 20 percent of the actual sale price. The median Zestimate error for Dare County is 17.2 percent. My sense is that if you are a buyer or a seller on Hatteras Island, and you are relying on a Zestimate for value, these represent substantial margins of error - and that is if you can even find a Zestimate for the property you are considering for purchase or sale.

Over the years, we have all been advised to double check the information that we receive via the Internet. That seems to be pretty good advice when it comes to estimates of real estate values. While the Internet is a very convenient resource for obtaining information with just a few clicks of a mouse, when it comes to real estate property values, a second opinion by a professional Realtor or a licensed appraiser is certainly in your best interest. 

Market Value

Given this survey of methods that are used to approximate value, we find that we have come full circle back to the original question – “What is the value of a particular property?”  All of the analytical approaches that we have reviewed are designed to provide an opinion about the “fair market value” of a property.  The market value of a property can be thought of as a composite of “typical” market prices.

One definition of market value is “the most probable price a property will bring in an arms-length transaction under normal conditions in an open market.”

A more detailed definition contained in the glossary of the Uniform Standards of Professional Appraisal Practice defines market value as “the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus…” 

A third definition that I personally like states that fair market value of a property is the price upon which a fully informed buyer and seller agree, assuming there are no undue influences (e.g., health issues, financial considerations, etc.) on either party and assuming the property has been exposed to the open market.

Having studied real estate values over the past 22 years, I have come to believe that the fair-market value of a property in its simplest form is the price upon which a willing and knowledgeable buyer and seller finally agree to complete the real estate transaction.  I also think that appraisals and comparative market analyses would be more realistic if they expressed opinions of market value as a range of values rather than a single number.  Estimating probable sale prices and appraised values is clearly more an art than a science.

Regardless of the valuations that result from an appraisal, a comparative market analysis, the county assessment process, or even an Internet-based estimate, in the end it is the agreement between the buyer and the seller that ultimately determines the value of any given property at a particular point in time.  The various analytical approaches do a good job of putting property values in the ballpark, but the buyer and seller are the decision makers who truly establish fair market value.

(NOTE: The primary sources for this article were: North Carolina Real Estate Manual, 2004-2005 Edition by Hetrich, Outlaw & Moylan, ©2004 North Carolina Real Estate Commission.  North Carolina Real Estate Commission Bulletins – “Broker Price Opinions” & “Comparative Market Analysis in Appraisers Act.”)


(Tom Hranicka is an associate broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Tom Hranicka at P.O. Box 237, Avon, NC  27915, or e-mail to [email protected] )
Copyright © 2012 Tom & Louise Hranicka.  All rights reserved.


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