In the world of California real estate, the Fair Market
Value (FMV) of the property being transferred is a crucial factor for both the
seller and buyer, because the seller does not want to sell for less than the
FMV, and the buyer does not want to pay more than the FMV. Also, the FMV is usually the determining
factor in how much a lender will agree to lend with a loan secured by the
property. Appraisals are frequently obtained
and accepted by parties to a transaction and lenders, but sometimes there are
conflicting appraisals, especially in litigated cases such condemnation-eminent
domain and divorces.
How can you prove FMV
at trial when the FMV is contested?
Under the California approved jury instructions, fair market
value is the highest price for the property that a willing buyer would have
paid in cash to a willing seller, assuming that:
1. There is no
pressure on either one to buy or sell; and
2. The buyer
and seller know all the issues and purposes for which the property is reasonably capable of being used.
This instruction should not be used if there is no relevant
market for the property, and instead, a special instruction needs to be
approved by the court for an appropriate alternative method of valuation.
FMV is a question for the jury, or judge in a court trial,
based on the highest and best use for which the property is geographically and
economically adaptable.
In a
condemnation case, where a governmental entity files an eminent domain case to
take property, the highest and best use is defined as that use, among the
possible alternative uses, that is physically practical, legally permissible,
market supportable, and most economically feasible. The appraiser must make a determination of highest and best
use as part of the appraisal process.
"Market
value" in turn, traditionally has been defined as the highest price estimated
in terms of money which the land would bring if exposed for sale in the open
market, with reasonable time allowed in which to find a purchaser, buying with
knowledge of all of the uses and purposes to which it was adapted and for which
it was capable.
Alternative
methods of valuation particularly apply to properties such as schools,
churches, cemeteries, parks, and utilities for which there is no relevant market;
therefore these properties may be valued on any basis that the court finds is
just and equitable. However, when there is a market for this property in the
private marketplace as demonstrated by the evidence, the trial court errs in
admitting evidence of a valuation methodology that ignores the developed market
for a particular type of property.
In
determining the FMV of the property, the jury must consider both the value of
the land and whether any buildings, machinery, or other equipment attached to
the property increase or decrease the value of the property.
The
jury is required to decide the value of property based solely on the testimony
of the
witnesses who have given their opinion of fair market value. The jury may
consider other evidence only to help it understand and weigh the testimony of
those witnesses. The jury may find the same FMV testified to by a witness, or it
may find a value anywhere between the highest and lowest values stated by the
witnesses. If the witnesses disagreed with one another, the jury should weigh
each opinion
against the others based on the reasons given for each opinion, the facts or
other matters that each witness relied on, and the witnesses’ qualifications.
California's Evidence Code § 813 provides that the FMV of property
may be shown only by the opinions of any of the following:
1. Witnesses qualified to express such opinions (i.e.,
expert witnesses);
2. The owner or the spouse of the owner of the property or
property interest being valued; or
3. An officer, regular employee, or partner designated by a
corporation, partnership, or unincorporated association that is the owner of
the property or property interest being valued, if the designee is
knowledgeable as to the value of the property or property interest.
Nothing in the California Evidence
Code prohibits a view of the property being valued or the admission of any
other admissible evidence (including but not limited to evidence as to the
nature and condition of the property. In
an eminent domain proceeding, the character of the improvement proposed to be
constructed by the plaintiff) may be admitted for the limited purpose of
enabling the court, jury, or referee to understand and weigh the testimony
given. Such evidence, except evidence of the character of the improvement
proposed to be constructed by the plaintiff in an eminent domain proceeding, is
subject to impeachment and rebuttal.
The “owner of the property or
property interest being valued” who can give an opinion of value includes, but
is not limited to, the following persons:
1. A person entitled to possession of the property; or
2. Either party in an action or proceeding to determine
the ownership of the property between the parties, if the court determines that
it would not be in the interest of efficient administration of justice to determine
the issue of ownership prior to the admission of the opinion of the party.
In
determining FMV, comparable sales may be considered under California Evidence
Code § 816, which provides that when
relevant to the determination of the value of property, a witness may take into
account, as a basis for his opinion, the price and other terms and
circumstances of any sale or contract to sell and purchase comparable property
if the sale or contract was freely made in good faith within a reasonable time
before or after the date of valuation.
In order
to be considered comparable, the sale or contract must have been made "sufficiently
near in time" to the date of valuation, and the property sold must be "located
sufficiently near" the property being valued, and must be "sufficiently
alike" in respect to character, size, situation, usability, and
improvements, to make it clear that the property sold and the property being
valued are comparable in value, and that the price realized for the property
sold may fairly be considered as "shedding light" on the value of the
property being valued. Differences, such
as a pool, are subject to an adjustment in the FMV.
California
Evidence Code § 823 provides that the value of property for which there is
no relevant, comparable market may be determined by any method of valuation
that is "just and equitable".
The
essence of comparability is recent and local sales, and after the trial court resolves
this preliminary legal question, it is then ultimately for the jury to determine
the extent to which the other property is in fact comparable.
No
general rule can be laid down regarding the degree of similarity that must exist
to make comparable sales evidence admissible. It must necessarily vary with
the circumstances of each particular case. Whether the properties are sufficiently
similar to have some bearing on the value under consideration, and to be
of any aid to the jury, must necessarily rest largely in the sound discretion of the
trial court, which will not be interfered with unless abused.
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