The fair market value is the price a willing buyer would pay a willing seller. It is assumed neither party is under any pressure to buy or sell. The fair market value is the artificial price a court will set for a piece of real estate, or interest therein, based on what an average willing buyer would pay if the owner were willing to sell.
It is very difficult to determine this, as one can imagine. It considers the current use of a property, the highest and best reasonable use, and any fixtures or machines attached to the land.
A court determines the value of a real estate or an interest based on what the average buyer would pay for it if the owner were willing to sell it. This isn’t an easy task. The fair market value is determined by 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 important in two circumstances:
Owners of the seized property or those whose property is for sale can greatly benefit from knowing the fair market value. The current owner of the real estate wants to ensure the fair market value is as high as possible to maximize their benefit. Alternatively, either the government or the buyer of the property will try to show that the property’s fair market value is as low as possible to minimize their losses.
How Is Fair Market Value Determined?
Appraisals determine fair market value. The property to be taken will be compared to comparable properties previously sold in the area. Other factors used by the court to make their decision include:
- Economic development in the area
- Its proximity to other properties with similar uses
- Existence of specific plans for the use of the land
- The property’s listing price
- Appraisal value of the property by the government
- Comparable properties in the same region that generate revenue or profit
Also considered will be the location, frontage, depth, improvements, and price previously paid for similar parcels.
What Is Eminent Domain?
Under the United States Constitution, the government may take and use private property for a public purpose if it compensates the owner. This is called eminent domain.
It is not uncommon for government agencies to take a piece of a landowner’s property for street widening or highway construction purposes. Federal and state governments typically delegate eminent domain powers 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.
Witness Testimony
In determining the real estate’s fair market value, a witness’s opinion is the most important factor. A witness’ testimony must include the following:
- Be qualified to express their opinions,
- Know that they can reasonably rely on making their opinion.
Comparable Sales
The fair market value of real estate can usually be calculated based on the price and terms of the sale of a similar home. A witness’ knowledge of comparable sales and documentation of comparable sales can be used as evidence. 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
The witness can use their knowledge, or records can be produced, to offer any lease agreements regarding the property being valued. When a court makes a decision, it will consider 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?
Generally speaking, a court will not consider any of the following in determining the fair market value of real estate:
- 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?
The court cannot speculate on the future value of a property when it is valuing it. However, the court will consider specific and concrete plans for the property, which can be proven through evidence such as proof of the recent granting of a zoning variance.
Generally, your land will be valued based on its highest and best use. A good example would be vacant farmland. Good farmland would sell for what it would bring on the market.
What Date Is Used to Determine Fair Market Value?
Various federal, state and local statutes determine when the value of the taken property should be used – generally, the earlier of:
- The date that the condemning authority deposits payment with the court; or
- The trial date for the issue determining the value of the property commences.
What If More than One Person Owns the Property?
Each owner of the property being taken will receive the fair market value for their interest in it.
What Is a Zoning Variance?
Zoning codes govern the size, location, and use of structures in 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 Should I Know About a Property Before Attempting to Purchase It?
It would be best if you learned about any disclosures for a property before you purchase it. Disclosures describe any problems the property has. Although states’ requirements differ, the property’s seller must reveal these disclosures to the buyer. It is typical for the seller to complete a checklist of all important, typical disclosures.
Disclosures may include flood damage, cracks in the foundation, termites, and property line conflicts. Sellers are legally required to disclose any substantial defects they know about. The active concealment of defects is unlawful.
In addition to the seller’s disclosure, alert buyers should hire an independent inspector to investigate the property for any defects. Inspectors may discover issues the seller was unaware of or did not disclose. In a purchase agreement, buyers can stipulate that the sale of the property is conditional on the completion of a property inspection. A clause may also specify that the review must be conducted by a qualified engineer or construction expert and at the buyer’s expense.
Additionally, you should ensure that the property is free of encumbrances. Having encumbrances on a property could prevent buyers from obtaining a legal title to the property or even taking possession of it. Encumbrances may include easements, encroachments, and other kinds of boundary and title disputes. Most encumbrances will be recorded at the county recorder’s office. Encumbrances include mortgages and liens.
A piece of property may be sold subject to a mortgage or other financial lien. Doing a title search through the county recorder’s office can help buyers determine if a piece of property has a mortgage or lien. As an alternative, a title insurance company can check and provide information about any encumbrances on the property.
Do I Need a Lawyer to Get Fair Market Value?
If a condemning authority wants to take your land, a real estate lawyer can explain how the fair market value is determined in your area. In addition, a real estate attorney can help you receive the compensation you are entitled to under the law during eminent domain proceedings.
