What is Eminent Domain in Real Estate?
As a real estate agent, you will encounter the terms ‘law of eminent domain’ or ‘eminent domain’ in real estate. But what does it mean?
Eminent domain is the government’s right to expropriate private property for public use. In exchange for this, the homeowner gets compensated with the property’s fair market value. Let’s break this down a bit further:
How Does Eminent Domain Work?
The process of eminent domain starts when the government or agency has a public interest project. This project would then need to be in a specific location that gives the greatest return to the public.
Once they have identified a specific property, an agent will evaluate it to determine its fair market value. So, the amount determined by the agent will represent the compensation that the owner of the property will receive in return.
The appraiser must be independent, accredited, and knowledgeable about the property.
After the fair market value is determined, the offer gets presented to the owner. But, if the owner finds this unreasonable, they have the right to hire an appraiser. If the buying party and owner can’t agree, then negotiations may begin.
That is why the owner should have an attorney throughout this process. A real estate attorney can ensure that the owner is aware of their rights.
What Does “Public Use” Mean?
One of the first requirements of eminent domain is public use. For a project to be considered as “public use,” it should serve a purpose that can benefit the public. That means if a project benefits personal interests or a specific group of people, no eminent domain shall take place.
Some examples of valid projects for public use are bridges, reservoirs, freeways, roads, and parks.
There are some occasions when people other than the government have the power to exercise eminent domain, such as public utilities.
Projects such as electricity lines or new pipelines get presented to the California Public Utilities Commission. Should the Commission find merit in the case, the public utility must win the case in the Supreme Court.
Once that is done, the Supreme Court will order the public utility to compensate the property owner with fair market value.
How Do You Determine Fair Market Value?
There are three different approaches to determining a property’s fair market value.
The appraisal agency notifies the owner of the property in advance when their home will be appraised. Also, the owner should be present during the appraisal.
Here are the methods used:
The Comparable Sales Approach
Comparable sales is based on the idea that no one else would be willing to pay more than they would for a similar property. This approach utilizes data from the recent sales of comparable properties to determine the value of a parcel of land.
Agencies will use this approach when determining fair market value for residential properties. Characteristics such as the number of bedrooms, bathrooms, and other features are used to identify similar houses.
The Income Approach
The income approach is ideal for income-generating properties. The fair market value of the property is based on the income that the property can generate. This method determines the value of the property as an investor.
The Cost Approach
This method is used for specialty structures wherein the property of interest is unique and is designed to operate for something specific. In cases such as this, the only acceptable way to replace it is to reproduce the structure elsewhere.
To determine the fair market value of the property, the experts would evaluate two different components. The first component is the value of the land without any structure. The second component is the value it would take to replace or reproduce the existing structure on the land.
It should be noted that under this approach, depreciation is also considered and is deducted from the final fair market value.
What are the Types of Eminent Domain?
There are several different types of eminent domain, here are some of them:
A complete taking occurs when the government takes an entire parcel. The owner’s compensation is equivalent to the fair market value of the property under its best use.
The partial taking only assumes a part of the land. The just compensation for partial taking consists of two different components.
The first component is direct damages. Direct damages refer to the acquired land’s value of improvements. The other component is indirect damages, which are referred to as severance damages.
As the name suggests, this type of eminent domain will only require the owner to give up their parcel of land for a fixed time. Typically, the just compensation for this taking is the rental value of the property that is being occupied.
Permanent taking means the property, condemned by the government, will never return to the owner. The most common projects with permanent takings are roads, highways, and other public infrastructures.
Final Thoughts on Eminent Domain in Real Estate
Eminent domain is an emotional experience. Nobody wants to lose their home. But, this is a power that the government holds over property owners.
For eminent domain to go into effect, there must be “public use” involved. Examples include building highways, schools, or other necessities. If not, then there are no grounds for eminent domain to stand on.
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