Valuing the marital home.

• Author: Lucas, Matthew C.

"Americans would sacrifice just about anything to own a home--it is one of their highest priorities in life." (1) Through booms and busts in the real estate market, that underlying sentiment has remained a consistent and integral part of the American meme. For most families, the single, largest investment they will ever make is buying a home.

In marital dissolution proceedings, one of the preliminary --and frequently litigated--issues in equitable distribution revolves around the marital home's value. How much is the family house, and all that is bound up with it, truly worth? Of course, all property is unique. (2) Nevertheless, in a contested dissolution action, the court must determine a home's monetary value in order to complete an equitable distribution of marital assets and liabilities. (3) This article explores some of the legal issues surrounding valuation of the marital home and real property.

Defining Fair Market Value

One could imagine a variety of approaches to value a house and its underlying land. The law in marital dissolution proceedings, however, as in many other areas of the law, relies upon the market. (4) That is, the property's value "depends on the price it would bring in [a] hypothetical market transaction." (5) The price derived from this hypothetical exercise is commonly referred to as the fair market value of property.

Definitions for fair market value have varied over the years, ranging from the succinct, "arm's length transaction," (6) to the more expansive: " [T]he amount of money which a purchaser willing but not obliged to buy the property would pay to an owner willing but not obliged to sell it, taking into consideration all uses to which the property is adapted and might in reason be applied." (7)

The most comprehensive definition of fair market value, however, can be found within the Uniform Standards of Professional Appraisal Practice (USPAP), a compilation of guidelines, rules, best practices, and professional standards promulgated by The Appraisal Foundation that has been adopted throughout the United States: (8)

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 are 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 best interest;

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. (9)

Divining the most probable price for a property's fair market value poses an interesting challenge in the law. On one hand, the analysis inherently requires elements of speculation; but then, it is a prediction that has the benefit of some long-established and widely tested means. (10) Analytically, the concepts of underlying market value are easily articulated as broadly stated principles, but value itself is ordinarily understood in terms of numbers. Or, as Judge Fletcher of the Third District aptly put it, "[a]ll of this is well and good, of course, but in order to translate words into dollar amounts there must be mathematical formulae to consider, and, of course, there are." (11)

Florida courts, following the lead of USPAP and real estate appraisal practice, have embraced three such formulae, or approaches, to valuing real property: 1) the market or sales comparison approach; 2) the income approach; and 3) the cost approach. (12) Each method will be examined briefly in order to provide an overview of how appraisers (and courts) have approached the valuation process for real estate. It is important to note here that these approaches are not exclusive of each other; to the contrary, appraisers frequently employ and correlate all three approaches, albeit with varying emphasis, in a process known as reconciliation to derive an overall fair market valuation for real property. (13) With that in mind, we could liken fair market value to a portrait hanging on a faraway wall, where we have three different lenses through which to look at it: Each should be tried, all might be needed, but one could end up providing the clearest view.

* Sales Comparison Approach -The sales comparison approach, as its name implies, looks to other sales of similarly situated homes from which to derive fair market value. More technically, the sales comparison approach has been defined as: A process of analyzing sales of similar recently sold properties in order to derive an indication of the most probable sales price of the property being appraised. The reliability of this technique is dependent upon (a) the availability of comparable sales data, (b) the verification of the sales data, (c) the degree of comparability or extent of adjustment necessary for time differences, and (d) the absence of non typical conditions affecting the sale price. (14)

It is probably the most easily understood and intuitively persuasive of the three approaches, particularly for residential homes. To draw a simple example, suppose the Jones family and the Smith family each live in similar three-bedroom, two-bathroom houses on the same street when the Smiths sell their home to a third party in an arm's length transaction. All things being equal, the price the Smiths are able to sell their home for could be an indicator of the approximate price the Jones family could expect to receive if they decide to list their house for sale.

Those who have ever reviewed a residential appraisal when buying a home will likely recognize this approach by its extensive compilation of information concerning other houses; that is, relatively recent sales of other similar, comparable properties (or, "comps," as they are sometimes called in appraisal vernacular), which are identified and described at some length within the appraisal report. (15) The selected comparable sales will yield a valuation created by weighing each transaction, assigning a dollar or percentage adjustment to reflect any qualitative or quantitative differences between the comparable sales and the subject property, and then reconciling a market value or range of values. (16) Assuming there is reliable information concerning recent transactions for similar properties, the sales comparison approach can be a highly useful and predictive measure of a marital home's value. (17)

* Income Approach--The second approach appraisers frequently utilize in valuing real estate examines the potential income produced by a property. That is, the anticipated profits from the property are analyzed, and then capitalized, in order to determine a value as of a specified date. An eminent domain treatise explained the method this way:

Under the income approach, an appraiser or other witness calculates the economic rent the property will command in the open market, deducts normal operating expenses to arrive at net operating income, and then capitalizes the net operating income by a rate of return to arrive at an opinion of fair market value. (18)

"Capitalizing," in this context, simply means an appropriate arithmetic method "[t]o convert periodic payments into an equivalent sum or sum in hand." (19) For those who work better from mathematical renderings, the Florida Supreme Court summarized the income approach in the following formula: (20)

Net Income/Overall Rate of Return(Capitalization Rate) = Value

Especially useful for measuring commercial or rent-yielding proper ties, appraisers still frequently consider a form of the income approach when calculating the value of a marital home. By applying a "gross rental multiplier" to the rent a home would likely bring, an appraiser can offer another view of fair market value for a rentable residential property. (21)

* The Cost Approach--Finally, as it is often a constituent part of appraisal practice, the cost method of valuing real property merits a brief mention. Essentially, the cost approach analyzes a hypothetical reconstruction of a property by combining elements of construction pricing, accounting, and land valuation together. The three-step process underlying the cost approach has been summarized as follows:

First, the land is valued as if vacant.... This is generally accomplished by using comparable sales data. Second, the reproduction or replacement cost of the structures or improvements are estimated. This is calculated by determining current prices of all materials, labor and necessary overhead.. Finally, accrued depreciation must be estimated and deducted from the total amount. (22)

The cost approach, according to one text, "[i]s particularly useful in valuing new or nearly new improvements and properties that are not frequently exchanged in the market." (23) Its usefulness in that one, defined context, however, does not necessarily carry over into others. Ordinarily, this approach is most applicable when there is no comparable sales data available for the property (24)--a situation that would be unusual in many single family home markets. Thus, for a variety of reasons, the cost approach is perhaps the one most frequently criticized within legal proceedings for its perceived shortcomings, particularly as it relates to valuing a residential home. (25) Again, though, common appraisal practice will amalgamate all three valuation approaches with different degrees of reliance and emphasis. (26)

Evidence of Fair Market Value

Turning now from the abstract approaches of real estate valuation, the evidence a...