FAIRNESS OF “FAIR MARKET VALUE”

The unfairness of “Fair Market Value” (FMV) is, well… who is to say what dollar amount is considered fair?  That was a question Virginia’s Supreme Court in Wilburn v. Mangano, 851 S.E. 2d 474 (Dec. 10, 2020) had to decide when determining whether a real estate contract was even valid when a buyer and seller agreed to sell property on a specified date using the ambiguous price term “at Fair Market Value,” without any more specificity as to how that FMV was to be determined.  That case is persuasive authority as to what may happen here in Florida.

FAIR MARKET VALUE

In Florida Real Estate Contracts should be “definite and certain as to essential terms.” According to Muñiz v. Crystal Lake Project LLC, 947 So.2d 464 (Fla. 3 DCA 2006) “essential” terms include:

  • Description of the land;
  • Interest in the land being conveyed;
  • The Purchase price;
  • Time of Payment; and
  • Terms of Payment (e.g. financing terms)

Florida’s Supreme Court defines FMV using ”the classic formula that it is the amount a purchaser willing but not obliged to buy, would pay to one willing but not obliged to sell.” Walter v. Schuler, 176 So. 2d 81, 86 (Fla. 1965) (“ ’fair market value’ and ‘just valuation’ should be declared ‘legally synonymous’”).

Florida’s Department of Revenue defines FMV as, “the price at which a property, if offered for sale in the open market, with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent, under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other.”) F.A.C. 12D-1.002(2).

The IRS defines FMV as “the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. If parties with adverse interests place a value on property in an arm’s-length transaction, that is strong evidence of fair market value. If there is a stated price for services, this price is treated as the fair market value unless there is evidence to the contrary.”  IRS  Pub. 544 Pg. 3 Sales and Other Dispositions of Assets

The Appraisal of Real Estate (14th  Edition, 2013)’s defines “Market Value”, as “The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self interest, and assuming that neither is under undue duress.”

The FDIC requires real estate appraisals for residential (if more than $400,000) and commercial (if more than $500,000) to be based on “Market Value.”  12 CFR §§ 323.3(a)(1),(13)12 CFR §323.4(e) “Market Value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

(1) Buyer and seller are typically motivated;

(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;

(3) A reasonable time is allowed for exposure in the open market;

(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and

(5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

Black’s Law Dictionary defines FMV, as “[t]he price that a seller is willing to accept and a buyer is willing to pay on the open market and in an arm’s-length transaction.” Black’s Law Dictionary 1865 (11th ed. 2019);

IS A PRICE STATING AT “FAIR MARKET VALUE” ENOUGH?

In Wilburn, a mother’s will and codicil (i.e. an amendment to a will) allowed her son to exercise an option to purchase the mother’s property by paying his two (2) sisters “an amount equal to the fair market value at the time of my death.”  The son served notice exercising his option, the sisters obtained two (2) appraisals of the FMV, with one valuing the property at $311,000 and the other at $270,000.  The sisters offered to settle in the middle at $290,500, but the brother refused.  The brother argued there was no enforceable contract because the price term was not sufficiently specific to establish mutual assent to the Property’s purchase price.  The trial court agreed and dismissed the case against the brother “because the method to compute fair market value was not provided.”  The Court observed that “An incomplete contract … is one from which one or more material terms have been entirely omitted” and that “A contract is uncertain if one of its material terms is expressed in so inexact, indefinite, or obscure language that the intent of the parties cannot be sufficiently ascertained to enable the court to carry it into effect.”  “Price is a material term, and it must be either “fixed by the agreement itself” or the agreement must provide a mode “for ascertaining it with certainty,” in order for a court to enforce….”

The Court noted that “There is no single, fixed approach to determine fair market value, as applied by appraisers or Virginia courts.”  “To determine a property’s fair market value, Virginia courts recognize many valuation approaches, such as the cost approach, income approach, sales approach, development cost analysis, and comparable sales approach.”

Valuation methods.    Appraisers can approach valuation using a: cost approach (how much will it cost to reproduce or create a comparable); income approach (how much income is anticipated); or sales comparisons approach  (how much are similar properties in relevant marketplace)[1]

The Court went on to state, “Each of these approaches utilizes different characteristics of a property to estimate fair market value, and each analyzes different elements of the property [as] likely [to] affect the price a potential buyer would be willing to pay for the property on the open market.”  Absent a more precise specification … regarding the particular approach to be applied to determine the Property’s fair market value as of Jeanne’s death, the codicil does not provide the price of the Property, or a means of ascertaining the price with certainty, without subsequent agreement between the parties. By its very nature, what is meant by the term fair market value—what a buyer is willing to accept and what a seller is willing to pay for something on a given day—cannot be known with certainty absent a more specific means for determining it being provided in the codicil. In this instance, the language in the codicil lacks the precision required to produce a ‘certainty’ as to price, which would allow a court to equitably compel a party to specifically perform a contract for the purchase of real property.”

Lesson to be learned.  If a buyer and seller are going to agree to price property at “FMV” then they may be well advised to come up with a method of making the price much more certain and definite.  In an effort to do so, I have seen parties agree to be bound by a certain appraiser, or by someone neutral who will determine an amount which everyone will be bound.   Either way seek advice.

DISCLAIMER:  Topics discussed are general concepts, not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney or accountant.  The author is neither an attorney nor an accountant.  FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.” ®

[1] See, Appraisal Institute, Understanding Appraisals, The appraiser estimates the degree of similarity or difference between the subject property and the comparable sales by considering various elements of comparison:

  • Real property rights conveyed
  • Financing terms
  • Conditions of sale
  • Expenditures made immediately after purchase
  • Market conditions
  • Location
  • Physical characteristics
  • Economic characteristics
  • Use/zoning
  • Non-realty components of value

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