Determining the Fair Market Value of Life Estate in Real Property

The fair market value (FMV) is the price of a property when it is evaluated for sale on the open market. This is the price that should be agreed by both the buyer and seller when they both have an average knowledge of the real estate market, and are willing to agree on a fair price. If the seller has some restrictions on the use of his property, the fair market value will reflect his request. Here is an example: if you have land and you restrict the use of your property to agricultural purposes, the land value will reflect this restriction, even thought it has a higher value when merely including its location, size and potential use.

There are a few factors to evaluate a property, such as the selling price, the experts’ evaluation, the replacement price and the price of a comparable property. There are also rules, methods and formulas to establish the fair market value of real estate, but a fair evaluation must be made by considering all the factors connected with a property. There is no universal formula to determine the fair market value of a property, but you must consider its desirability, the selling price and its use. You must also consider the market conditions; important changes may often occur such as an unusually deflated or inflated market rates.

A factor that affects the fair market value is the cost or selling price at the last transaction the property was involved in; you must know the date of the sale or purchase of real estate and the price that it went for. If the transaction was made a long time ago, there has likely been an increase or decrease in the property value since that time. If you have some opinions from experts, you must find if the expert is competent and if his opinion is based on experience and supported by facts and relevant qualifications. The value of similar real estate is also important; however keep in mind that the degree of similarity between the properties should be accounted for.

You can also consider the replacement cost to establish the fair market value of life estate in property; the cost of building a similar property is useful in determining the fair market value. You must also consider a connection between the fair market value and the replacement price. The replacement cost for a new building, for example, can be less important if your property is really old. You must subtract from this price the figure representing the depreciation value or appreciation as and when it applies.

Another important method to determine the fair market value is the selection of comparable sales prices. Keep in mind that the similarity degree is also very important. Real estate is almost always unique and the valuation is usually somewhat different from one property to the next; a detailed appraisal report is a must and multiple accounts will usually provide different results. It is wise to find a professional, trained appraiser to establish the appraisal report. This report will contain the street address, the block or lot number, the legal description, dimensions and other necessary information, such as the use of the property, and other permitted uses, physical features and present condition. The professional appraiser can also describe other uses for your property and account for them accordingly.

A professional appraiser combines three methods to evaluate your property: comparable sales, capitalization of income and replacement cost. The last method must also consider the observed depreciation.