| September 17, 2013
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!”
Hatteras Island Real Estate: What is a property worth?
By TOM HRANICKA
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.
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
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
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.
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.
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
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
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
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.
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
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
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.
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
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.
definition of market value is “the most probable price a property will
bring in an arms-length transaction under normal conditions in an open
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
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
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.