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Three Methods of Determining Fair Market Value in Eminent Domain

The purpose of an eminent domain action is to compensate the property owner properly for the property that the government is taking for public use. It is important to understand the different ways that the property that will be taken is valued. There are three main methods that real estate appraisers customarily use to determine the fair market value, and usually a combination of the three is used to determine the fair market value.

Comparable Sales

In the comparable sales method, the appraiser looks at properties that are similar and recently sold in the same area. This may not peg the exact value of the property but will hopefully get the value in a range that is close to the actual value of the unique property. Many times in eminent domain cases, the parties will argue about the properties that were included in the comparable sales and may argue that a certain property should not be included as it is not close enough in character to the property at issue or the sale was too far away in time to be a comparable sale. The expert appraiser can also be cross-examined regarding which properties she included in her comparable sales analysis as that information goes to the weight of the evidence and considered by the jury when valuing the property.

Income

The income method to valuing a property simply values the property as the present value of the future cash flows. The Fourth District Court of Appeal has stated that when valuing a property with the income method it is the best method as it takes the actual rent received for the property being used at its highest and best value. However, in order to obtain the current fair market value for this, the rental transaction must have been at arm’s length and must have been recent enough to be a current market rent. Additionally, in order to use this method, the property must be currently rented or otherwise producing income directly from the physical characteristics and location of the property.

Cost

The third method to determine the fair market value of property is the cost approach which uses the current replacement cost. Courts have rejected the contention that this approach would allow a property owner to be paid their original cost for acquiring the property, unless that original cost is the current replacement cost. When the court determines what the replacement cost is, it looks at the cost to reproduce any improvements on the property and reduces that cost by the amount of depreciation and other obsolescence of the property. The obsolescence may include anything that would result from an external or environmental influence or any of the structures no longer being necessary. While this method is often used by courts, it can be inaccurate and unreliable, as it does not factor in the inherent value of the land.

During an eminent domain trial, fair market value is determined by a jury of 12 of the citizens of the circuit where the property is located based on the evidence presented. Therefore, it is important to have an eminent domain lawyer who understands the different valuation methods and who will choose an expert appraiser that will present compelling testimony as to the valuation. If you have any questions about the information in this article or are concerned that the government may be taking your property in an eminent domain action, please contact me to discuss further.

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