How to Make Sure the Fair Market Value Offer for Your Property Is Really Fair
In situations where the fair market value of your property is at issue, it is highly advisable that you, as the owner, gain a basic understanding of what goes into the valuation formula to ensure that the end result is fair and accurate.
While there is no uniform definition of what is “fair market value” that applies to all situations, a general definition can be properly characterized as follows:
The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.
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So let’s take a moment to examine the meaning of each of these key terms: purchase price, willingness of the parties to engage in the transaction, and knowledge of all relevant facts. Knowing what these terms mean will go a long way in being able to determine if a final value conclusion on your property is one that you can agree with or one that needs to be disputed.
Purchase Price and Comparable Sales
While there are many ways and methods to value real property, typically valuation determinations start with the purchase prices of properties similar to one being evaluated that have recently sold on the open market. Generally, these are completed transactions, meaning that the purchase price and terms of purchase have both been agreed to between the buyer and seller, and the transactions have actually closed so that title has been transferred. It is important to understand that in many jurisdictions, this definition of what is fair market value precludes consideration of mere listing prices or offers of property for sale that have not been consummated.
Because the degree of “similarity” between the owner’s property and the sale property to which it is being compared is a somewhat subjective analysis, this often leaves room for dispute. For instance, are the properties truly similar in terms of location, access, utilities, zoning, land use, terrain and topography, etc? And if there are meaningful differences, have those differences been adequately taken into account by appropriate adjustments or other calculations?
In order to develop an accurate indication of value, all factors relating to comparability between the properties utilized to determine fair market value must be carefully analyzed and evaluated to ensure that the sale property is sufficiently similar to the owner’s property. In cases where the owner’s property is being taken as part of an eminent domain action, eminent domain lawyers representing the property owner will often critique and critically analyze each of these elements of comparability. This is an especially important part of the negotiation process when reviewing the condemnor’s appraisal and any offers made based on that appraisal.
When evaluating sales data to determine the fair market value of an owner’s property, the element of “willingness” precludes consideration of transactions that are either forced, made under duress or coercion, or otherwise not deemed voluntary. For instance, if the property was sold as part of a foreclosure, public auction or bankruptcy, that might indicate the absence of a “willing” seller. In each of these situations, in the absence of information to the contrary, there is a presumption that the seller received less than the full value of their property.
Furthermore, in many jurisdictions, sales made to a condemning authority are considered forced sales. This classification is based on the assumption that the sale occurred under the threat of condemnation. If so, such sales should not be considered while doing a fair market value calculation.
Knowledge of Relevant Facts
The definition of market value also embraces the concept of informed parties—meaning that both the seller and the buyer are presumed to be fully knowledgeable of all the relevant facts and information that they would typically be aware of in a true real estate transaction.
In other words, the concept of fair market value assumes that parties to a transaction are each working in favor of their own interests. This means that all details about both the property being evaluated and the property or properties to which it is being compared (both good and bad) are known by the parties and being properly leveraged in an effort to reach an acceptable purchase agreement. In this way the market value formula is intended to duplicate what the purchase price of the subject property would be if it too were sold on the open market.
Lauren Alexander is the Content Marketing Strategist for Owners’ Counsel of America, a network of experienced eminent domain attorneys dedicated to defending the rights of private property owners across the US.