Market Value vs. Just Compensation: The Appraiser’s Role in Federal Land Acquisitions

market value vs. just compensationThe purpose of the Uniform Appraisal Standards for Federal Land Acquisitions, colloquially known as the Yellow Book, is to promote fairness, uniformity, and efficiency in the appraisal of real property in federal acquisitions. Those words permeate the philosophy expressed in the Standards. Regardless of whether the government’s land acquisition is voluntary or by eminent domain, the government must pay just compensation. Your role as the appraiser is to develop a credible, reliable, and accurate opinion of market value that the client agency can use for just compensation purposes.

Take a deep dive into the appraisal process with our new Yellow Book course: Uniform Appraisal Standards for Federal Land Acquisitions.

The appraiser’s role

When the government is taking private property, your job is to develop an opinion of market value that can be used to determine just compensation under federal law. As the appraiser, you do not determine just compensation, but your value opinion can be used for others to determine just compensation.

The government has tremendous power and responsibilities related to property rights—that is, constitutionally protected property rights. In a Yellow Book appraisal assignment, you will often encounter different valuation problems and more rigorous standards than in the “typical” appraisal assignment. The Fifth Amendment to the United States Constitution provides, in part:

“No person shall be … deprived of … property, without due process of law; nor shall private property be taken for public use, without just compensation.”

Sometimes, the Yellow Book Standards may necessitate modification to meet agency programs, special legislation, or negotiated agreements. Any modifications require specific written instructions from the client agency or legal counsel. (Note: Appendix A, Legal Instructions, lists the fifty-five specific occurrences when legal instructions may be required.)

Market value vs. just compensation

The overarching terms you must remember as you learn more about the Yellow Book Standards are “market value” and “just compensation.” (In this context, the word “just” means “fair.”) Just compensation is a constitutional right, bolstered by federal courts’ case law. But “just” to whom?

“To award [a landowner] less would be unjust to him; to award him more would be unjust to the public.”

Hence, “just compensation” means compensation that is fair to all parties, both the landowner whose property is being taken and the public that will benefit from the taking (and who is paying for the taking).

How is just compensation determined?

Exactly how is “just” measured? The U.S. Supreme Court has held that market value is the measure. That is where you enter the picture; as the appraiser, you develop an opinion of market value.

You must apply federal law in the development of an opinion of market value. Most of the time the application of the law is straightforward, but sometimes valuation problems require you to consult with and receive written legal instructions from the client agency or legal counsel.

The Yellow Book Standards cover appraisal development, appraisal reporting, appraisal review, and legal foundations for the appraisal standards for federal land acquisitions. The sixth edition of the Yellow Book (published in 2016) reflects developments in appraisal methodology and theory, case law, and other federal requirements. The Standards have been restructured to follow the appraisal process from development to reporting to review. Learn all you need to know about Yellow Book appraisals in our new CE course: Uniform Appraisal Standards for Federal Land Acquisitions.

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