Different ways to value Real Property
In eminent domain, there are multiple ways to value real property under the fair market value standard. The two most prominent are the Comparable Sales Approach, and the Income Approach.
The Comparable sales approach attempts to capture the physical characteristics of the property and its improvements in other similar sales within a reasonable geographical area of the valued property. The Income approach requires inspecting leases, the terms, and the capitalization rates. Usability and tenant improvements become important under the income approach.
A third and less often appraisal method is the Cost Approach. Under the cost approach, appraisers capture a supported estimate of the cost to rebuild the improvement they are valuing. The approach can be complicated, as it involves the cost of labor and material.
Eminent domain can be likened to replacement coverage insurance in some ways. If the government is seeking to acquire your property, the baseline offer will reflect the fair market value. However, property doesn't come with a current price tag like consumer goods. A government-hired appraiser comes up with an estimate. Another appraiser could come to a completely different, perhaps higher, estimate.
The government has to depend on its appraiser's estimate in an eminent domain proceeding, but you do not. To receive compensation you feel is just, though, may require some work.
Methods of property valuation
In the context of property valuation, three different approaches are widely recognized by the legal system.
Market Approach: This is perhaps the most common method. The resulting value estimate reflects the appraiser's opinion after a check of recent sales of other property in the same area. The question worth asking is how comparable the selected comparisons are.
Cost Approach: This model might be used if the property in question has existing structures on site. The appraisal would seek to take into account the cost of replacing the land and structures -- after deducting an amount for depreciation.
Income Approach: Most real estate retains or increases in value over time. That makes it a popular investment vehicle. That might demand that a property's income potential be considered as part of a complete property valuation, but will a government appraisal include that?
This list of factors influencing property valuation is not comprehensive. Any or all factors deserve to be considered when government seeks to secure property by eminent domain. The way to protect your rights in this regard is by consulting attorneys skilled in this area of law.