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 property owner must receive just compensation—which is often based on the property’s fair market value, but can also include other amounts in certain situations (especially in partial takings). 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, the agency will typically have it appraised to estimate its fair market value. The amount determined by the appraisal helps form the compensation offer the owner may receive in return.

The appraiser must be independent, accredited, and knowledgeable about the property.

After the value is determined, an offer gets presented to the owner. But if the owner finds this unreasonable, they have the right to hire their own appraiser. If the buying party and owner can’t agree, then negotiations may begin.

If negotiations still don’t resolve the situation, the agency (or authorized entity) may file a condemnation case in court to take the property and have compensation determined under the law.

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.

It’s important to know that “public use” (sometimes described as public purpose) is often interpreted broadly. In other words, a project can still qualify as public use even if a private party benefits, as long as the overall purpose is considered public (like transportation improvements, utilities, redevelopment, or community-wide economic benefits). State laws can be more restrictive, so the exact rules can vary depending on where the property is located.

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 may require approval by a state utility regulator (for example, in California, certain utility projects are reviewed by the California Public Utilities Commission). If authorized, the public utility may then move forward with an eminent domain action through the trial court process to acquire the needed property rights and determine compensation under the law.

How Do You Determine Fair Market Value?

There are three different approaches to determining a property’s fair market value.

The appraisal agency typically notifies the owner of the property in advance when their home will be appraised. Also, the owner is often given the opportunity to accompany the appraiser during the inspection and share information that could affect value.

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:

Complete Taking

A complete taking occurs when the government takes an entire parcel. The owner’s compensation is generally “just compensation,” which is typically based on the fair market value of the property under its highest and best use.

Partial Taking

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.

Temporary Taking

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

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 Because “public use/public purpose” can be interpreted broadly and rules vary by state, owners typically focus on (1) whether the stated purpose qualifies under that state’s law and (2) whether the compensation offered meets the “just compensation” standard.