Acquisitions by Eminent Domain Require a Very Specific Set of Appraisal Skills
August 8, 2016
The role of the appraiser is very different when appraising real estate to be acquired by eminent domain than when appraising real estate that is purchased in standard open-market transactions.
"Eminent domain is defined as the right of the sovereign government to take private property for public use upon payment of just compensation." This right is granted to the United States, states, and municipalities, together with their various public agencies. It may also be granted to private persons and corporations. Eminent domain is sometimes also referred to as "condemnation."
Typical Purchase Versus Eminent Domain Purchase
With a typical private property acquisition, the seller lists the property for sale at market value or at a price the seller determines is necessary to sell the property. The seller usually controls the circumstances under which the property is made available for purchase. Potential buyers then view the property and make a conscious decision to bid on it.
Under eminent domain, however, the buyer (most often a government or public agency) identifies a property, or a portion of property needed for a public use. That property is normally not listed for sale and the seller has virtually no control over whether to make the property available for sale or not. This is known as a compulsory acquisition.
The agency/buyer approaches the property owner after the public use project has been planned, reviewed, and approved for acquisition, including through the court having jurisdiction over the process. The property owner is entitled to payment of just compensation.
This post will further delve into the fundamental differences between private property acquired by eminent domain and property acquired in a more normal open-market acquisition, and why these differences require an experienced condemnation appraiser with a "very specific set of skills."
The Role of the Appraiser
The primary differences between an appraisal for an acquisition by eminent domain and an appraisal in a traditional acquisition include:
- A written "offer appraisal" must typically be prepared by the acquiring party and before negotiations commence, as if the influences, if any, from the proposed public project do not affect the value of the property under negotiation. In some jurisdictions, and under certain criteria, comparable data and value ranges may be sufficient to start the offer process.
The property owner (seller) need not provide a written or detailed appraisal at the time of the initial offer.
- Appraisers must be knowledgeable of matters of eminent domain, including relevant: appellate court and federal and state Supreme Court rulings ("case law"); Code(s) of Civil Procedure; Rules of Evidence; Government Code Sections; and the general nature of condemnation proceedings, including trial.
- The property owner is entitled to "just compensation," which may be more than the market value of the property rights acquired.
In developing the opinion of value, the appraiser must recognize if the property to be acquired is a full acquisition or a partial acquisition, and if the legal property rights to be acquired are in land and/or improvements, or are of permanent or temporary easements or of various types of other real property rights – access, air, abutters, for example.
If the acquisition is a partial taking, the effects of the acquisition and the public project as proposed on any remainder property must also be appraised and valued as part of the property owner’s just compensation.
Effects that reduce the value of the remainder property may be compensable as severance damages or consequential damages. Conversely, effects that increase the value of the remainder as a result of the public project are known as "benefits" or "special benefits" and may reduce the amount of just compensation to the owner.
The Offer and Process
Once the initial offer appraisal is completed, a written offer to purchase the property is presented by a representative of the acquiring party. If the property owner declines the offer, the parties may continue to negotiate and the seller may provide additional information relevant to the valuation. The buyer may then reevaluate the appraisal offer.
If the parties cannot agree on the market value of the property to be acquired during these initial discussions, the owner may choose to engage an attorney, appraiser, and/or other consultants. The agency may also choose to commence condemnation proceedings.
Why an Experienced Appraiser?
If condemnation proceedings begin, the appraisers for each party may be required to testify in deposition(s), at hearing(s), or in trial. This means the appraiser must be knowledgeable and experienced in the proceedings, including in presenting deposition, direct, and cross-examination testimony. It also requires preparing trial exhibits to inform the judge and jury ("triers of fact") of the relevant facts and opinions of the case.
As you can see, appraisals developed for property acquisitions by eminent domain are very different from appraisals for other purposes – such as open-market acquisitions, lending/financing, estate planning, or property tax appeals. Because of the complexities of the appraisal process itself, as well as the potential legal proceedings, an experienced appraiser is needed to get the assignment done right (pun fully intended) the first time around.
Have one of our experts in your locale contact you to discuss the condemnation practices relevant where your property is located.