When Fair Markets Aren’t Fair

According to Wikipedia:

Fair market value (FMV) is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or extrapolation. Fair market value differs from the intrinsic value that an individual may place on the same asset based on their own preferences and circumstances.

So in Lamar County, we have some land that the School Board owns. The improvers of land there pay annual leases, adjusted annually, and in the event of sale. The owners of the leasehold interest pay 5%-7% of the fair market land value annually, to the school board. 

How do they establish fair market value? They look at appraisals. But the appraisers have a State mandate to use fee simple comps to appraise the 16th Section property. So essentially, if this property didn’t have this additional expense, it would be worth X. And that’s it. X is the value that they are using. 

If I have a rental home that I’m selling for $150K, and there’s an identical one down the road selling for $150k, but has an additional $50k in annual expenses, which one would you buy? It’s a no brainer. 

In Lamar County, there are 16th Section lease holders who are “tossing back the keys” to their properties. The skyrocket of 16th Section fees just made it completely ridiculous to stay in business there. Now you can pick up these properties for the cost of the annual lease. To me, that is called free. In a fair market, when something is free, it effects the cost of similar goods or services in the area. But in Lamar County, we’re using appraisals on fee simple land, when there is similar 16th Section land right across the road for free. 

How do we fix it? Redefine fair market. Or really, just use the actual definition

  • The appraised properties need to have the same conditions as the subject property, or at least be adjusted to those conditions. 
  • If something is given back in that market, it needs to effect that market. If I pick up a piece of property for free, appraisers should be able to use that as a comp. 

 It’s how fair markets work. This isn’t one of those.