Fair market value is the artificial price a court will say some real estate, or interest therein, is worth. Typically, this is determined by asking: “What would a willing and able buyer pay a willing and able seller for that particular piece of property?” This is a complicated question to answer. Fair market value is the price a willing buyer would pay a willing seller. This assumes neither party is under any coercion to buy or sell. Fair market value is also the artificial price.
A court will determine a piece of real estate or interest therein is worth based on a conclusion of what the average willing buyer would pay for it if the owner were willing to sell it. As one can imagine, this isn’t easy to determine. Fair market value considers the present use of the property, the highest and best reasonable use, and any fixtures or machinery attached to the land.
Why Is Fair Market Value Important?
Fair market value is generally crucial in two circumstances:
- Eminent Domain or inverse condemnation proceedings
- Purchase and sale of a home
Fair market value can significantly influence the amount of payment the owner of a seized property or the property owner up for sale can obtain. Typically, the current owner of the real estate wants to show the fair market value is as high as possible to maximize the benefit they will receive.
On the other hand, either the government or the real estate purchaser will try to show the fair market value is as low as possible to minimize their losses.
What Is Eminent Domain?
Under the United States Constitution, the government is permitted to take and use the property for a public purpose if they give the landowner appropriate compensation. This is known as eminent domain.
For example, government agencies will take a piece of a landowner’s property for street widening or highway construction undertakings. Typically, federal and state governments have entrusted this eminent domain power to local governments and municipalities.
If multiple individuals, such as with joint tenancy or tenancy in common, own the property, then the government will compensate each owner for their own percentage.
How Can I Determine Fair Market Value?
Fair market value is a tricky thing to establish. Due to the high level of speculation that accompanies the fair market value of the real estate, a court will be willing to consider any of the following to decide the fair market value:
Witness Testimony
The opinion of a witness is the most pertinent factor in a court’s determining process of the fair market value of the real estate. To consider a witness’ testimony, that witness must:
- Be qualified to express their opinions,
- Have knowledge that they can reasonably rely on in making their opinion.
Comparable Sales
The price and terms of the sale of a similar home can usually be used to determine the real estate’s fair market value. Both documentation of comparable sales and a witness’ knowledge of comparable sales can be used. To be considered, the comparable sale must be:
- Close in time and date from the present conflict
- Located near the property being valued
- Sufficiently comparable in character, size, condition, and usability to the property being valued
Lease Agreements
A witness can use their knowledge, or records can be produced to offer any lease agreements regarding the property being valued. In a court’s decision, it will look at such things as:
- Rent payments,
- Terms of the lease, and
- When the lease was drafted and entered into.
What Evidence Cannot Be Used to Determine Fair Market Value?
Typically, a court will not consider any of the following in making its determination on what the fair market value of real estate should be:
- Price or terms in the sale of the property for public use,
- The offering price of the property,
- The listing price of the property,
- The assessed value of the property for government taxes, and
- The revenue or earnings coming from the property or comparable properties
What If I Had Plans to Use My Land?
When the property is being valued, the court cannot speculate on the future value of the land. Nevertheless, the court will consider detailed and concrete plans for the property, which can be established through proof of the recent granting of a zoning variance.
Your land will be valued according to its highest and best use. A typical example of this is if you have vacant farmland. You will be paid for the price of what good farmland would bring on the market.
What Is Zoning Variance?
Zoning codes regulate structures’ size, location, and use within defined areas. If individuals wish to deviate from regulation, they must apply to the relevant governing body for a variance to change the particular zoning code.
What Date Is Used to Determine Fair Market Value?
There are different federal, state, and local statutes determining when the value of the taken property should be used. Most statutes define the value as the earlier of:
- The date that the condemning authority deposits payment with the court; or
- The date the trial of the issue determining the property’s value commences.
What If More Than One Person Owns the Property?
If several owners own the property taken, each owner will receive the fair market value for their interest in the property.
What Should I Know About a Property Before Attempting to Purchase It?
Before seeking a property, you will need to learn about any disclosures on the property. Disclosures refer to any issues with the property. Although states’ requirements differ, the property’s seller must reveal these disclosures to the buyer. Typically, the seller will complete a checklist of all important, typical disclosures.
These disclosures could include flood damage, cracks in the foundation, termites, property line conflicts, etc. Sellers are legally required to reveal any substantial defects that they know of. The active concealment of a known defect is prohibited.
In addition to the seller’s disclosure, alert buyers should employ an inspector to perform an independent survey of the property to discover any defects. The inspector may encounter issues that the seller was unaware of or did not reveal. Buyers have the right to put a clause in the purchase contract saying that the sale of the property is contingent upon completing a property inspection. The clause may also state that the review must be conducted by a qualified engineer or construction expert and at the buyer’s expense.
Further, you should ensure that there is no encumbrance on the property. An encumbrance on the property could deter buyers from obtaining legal title or even possession of the property. Encumbrances may include easements, encroachments, and other kinds of boundary and title disputes. Most encumbrances will be recorded and located at the county recorder’s office. Related to encumbrances are mortgages and liens.
A piece of property may be sold subject to a mortgage or other financial lien. Buyers should review whether a piece of property has a lien or mortgage by doing a title search through the county recorder’s office. Alternatively, a title insurance company can check instead and provide information regarding any such encumbrances on the property.
Do I Need an Attorney to Help in my Fair Market Value Dispute?
Suppose you find yourself in an eminent domain or inverse condemnation proceeding, and the fair market value of your property is in question. In that case, it is highly recommended that you contact a property or real estate attorney.
If you consider buying or selling some real estate and the fair market value of that real estate is at issue, it is a good idea to consult with an attorney. An attorney will be able to explain the relevant topics and help defend your interests regarding the real estate being valued.
