Many property owners, at one time or another, are going to face an instance where the eminent domain law is going to come into effect. Eminent domain is the law that allows the state or federal government to acquire a piece of property that you may own for public use. The catch to this is that they are also required by law to pay you fair market value for that property. Interpreting fair market value can vary depending on the method that you use to come to the number. Let’s take a look at three of the more common methods appraisers use to get to the end value.

Comparing Sales of Similar Homes

One of the easiest ways to gauge the fair market value of your property, and what appraisers often use, is recent sales of homes similar to yours. This is accomplished by pulling real estate sales data in your area and then narrowing it down so that you end up getting to homes that are in the same ballpark as yours. This would mean that they would be about the same size, have the same number of bathrooms, yard, and so on.

This approach, known as the market approach, will then place a value on your home utilizing this recent sales data. If two homes similar to yours and in the same town recently sold for $300,000 and $275,000, respectively, the market value of your home could, in theory, be somewhere between those two numbers.

Replacement Value as a Measure

The other measure that is often used is the replacement value of your home. This method is a bit more complicated compared to the market value, as you have to assess not only your home itself, but the land that it sits on. An appraiser is going to estimate the true value of the land your home resides on. This is often left up to a lot of interpretation, but recent sales of lots of land provide some insight. The next piece of information would be the calculation of what it could cost to literally rebuild your home. The sum of these two figures gets you the replacement value, which is used when no similar sales data is present.

Choosing Which Works Best for You

If one of these methods provides your home with a higher fair market value then that is the one that you should be pushing to be the value the government pays to you. If your home or property generates income, that can also be factored in and added onto what is calculated as the value using one of the other two methods.

Fair market value is not a tried and true formula that anyone can figure out. It is an interpretative figure that incorporates prior sales data, thoughts on costs to rebuild a home, the value of land the home sits on, and any income the home generates. Taking everything into consideration can help you understand where fair market value truly comes from.