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If you have a property in the U.S, then usually speaking, your rights as a property owner are protected. For example, you are entitled to the “bundle of rights” which include,
- The right to use or possess the property;
- The right to control their property;
- The right to acquire, sell, or transfer the property to others, alter it, abandon it, or destroy it;
- The right to enforce property rights and exclude others from entering it
Protecting property rights is essential to everyone. After all, no one would want their home or investment property to be taken away without a proper reason or fair compensation.
So can the federal government or state take your property without your permission? As I was reading one of the topics in the real estate salesperson exam, I came across the term “Eminent Domain.”
Eminent domain, or “condemnation,” is the power possessed by federal governments to acquire private property rights for public use. This type of acquisition is permitted under the “Takings Clause of the Fifth Amendment” of the United States Constitution and requires that the government pay just compensation.
In this post, you’ll learn what is the requirement to exercise eminent domain. What rights do property owners have? How to come up with “just compensation” and what defines “public use.” You will also find the actual cases which involve eminent domain in U.S history.
I hope this article can help you to have a better understanding of the eminent domain.
Here is a 2-minute simple video that explains Eminent Domain
The above clip is from PrepAgent. If you are struggling to understand real estate concepts from a boring textbook, then you must check out their exam prep programs. They have many helpful videos and audio lessons that have helped many students to pass the real estate exam. Here is the link to their exam prep program. (**)
What must the acquired property be used for?
According to the United States Constitution, if the government exercises the power of eminent domain to take over a private real estate, it must be for “public use”. Constructing new highways, bridges, roads, and parks are some common examples of public use.
There are other reasons that the federal government might want to acquire your property through eminent domain, which includes building railroads, or government buildings.
Additionally, energy companies might want to acquire your property via eminent domain. This usually happens when a land is needed for the operation of public utility lines, etc.
However, the term “public use” is a bit ambiguous and is not as clear cut as it may seem. In some cases, this could become an argument point for property owners who disagree to give up their real estate under the eminent domain.
How much money will you be compensated?
The government will perform its due diligence for any plan it may have for a specific location or group of properties. Once the government establishes and approves a plan, their next step is to find out what is a “just compensation”
A “just compensation” is basically the fair market value for a property that must be paid to a landowner who has had (or is having) their property is taken by the government.
To do so, the government will contact the property owner to arrange for an appraisal.
An appraisal is crucial to determine just compensation in the eminent domain process
An appraisal is where an independent real estate appraiser provides an unbiased opinion about the value of a real estate. In most scenarios, the assessment would be completed by either a Certified Residential or Certified General Appraiser. Also, a copy of the appraisal report will be provided to the property owner.
(On a side note, if you are wondering what makes a real estate appraiser qualifies to estimate the property value, here’s a post which talks about the education, exam, and training that they need to go through.)
Based on the appraised value and other consideration factors, the government then makes its first offer to the property owner. While this offer is supposed to represent “just compensation” for the property being acquired, it’s possible that the first offer could come in short.
After all, why would anyone pay a higher price if the homeowner is willing to accept a low compensation?
Having a second opinion could make a key difference
For this very reason, it’s better to have the offer examined by a skilled condemnation attorney to understand your options. If you and your attorney agree that you deserve additional compensation, your attorney can negotiate with the government on your behalf.
Your attorney may suggest hiring another appraisal company for a second opinion about the value of your property.
You may order a “Review Appraisal” where another appraiser with a higher competency level of appraisal knowledge would review the initial report. A second appraisal and opinion could be a powerful supporting document in challenging the government’s assessment of your property.
Here is another post I wrote which covers the different types of Review Appraisal.
Sometimes the actual compensation can be different from the market value
To better understand the valuation of a property going through eminent domain, I connected with a professional through an appraisal group. Below is what he shared with me:
“The issue of compensation is much more than “fair market” value. Also, the definition of fair market value can be different based on state and the source of funds for the project. Thus if federally funded, the project will often have to comply with federal and possibly state rules.
Also, many jurisdictions use a definition of fair market value that refers to ‘the highest’ price, not “most probable” as in the USPAP definition.
About a decade ago, I testified before a committee of the California Legislature to explain the condemnation process and that most property owners got at least 10-20% more and often much more than if sold on the market.”
Matt Myers, MAI, MRICS, FIV, RV, Assistant Professor Real Estate
Expert discussion about the eminent domain from leading scholars
I just watched the video below, which could help you gain a better understanding of the eminent domain. It is a 12 minutes clip from the Khan Academy. The interviewer, Kim, talked with two scholars Richard Epstein and Eduard Peñalver.
In here, they talked about the core principle of the eminent domain, the logic, and the history of this law.
What RIGHTS does the owner have under the eminent domain?
From what I understand, there are three major rights you have as a property owner. Although I already have partially covered the concepts in the previous sections, they are so crucial to eminent domain. Therefore, I will recap these rights in a more structural manner.
1) The Right to Fair Market Value
The most significant right that a property owner has when it comes to eminent domain powers is the right to receive the fair market value of their property from the government.
However, the federal government cannot determine on its own what they consider to be reasonable market value for your property.
If you are a property owner, I’m sure you wouldn’t want to be bounded with whichever amount of compensation that the government is providing you. Therefore, the valuation will be done by an independent appraiser to determine its fair market value.
As such, it is not mandatory to accept the first offer, and frankly, you should consider getting a second opinion. Talk to a real estate agent, hire another appraiser or consult with an attorney competent in condemnation proceedings.
If you believe you should be entitled to a greater amount of compensation, do not be afraid to challenge the federal government. There is a chance to work out a settlement closer to the property’s fair market value.
2) The Right to Have Proper Legal Representation
As with most legal proceedings, you have the right to obtain an eminent domain lawyer who is an expert in eminent domain cases and can assist you in negotiating with the government.
3) The Right to Challenge the Eminent Domain
Besides challenging the amount of just compensation, whether the acquisition can fit into the definition of “public use” could be another valid argument.
The federal government likewise must able to demonstrate in a court of law that your property is an absolute Necessity for public usage.
For example, a State Governor cannot use the eminent domain power to acquire your property, then use it to build a cottage only for personal usage.
Are you still confused about this topic? Don’t worry. Just click here to check out the PrepAgent program. They have tons of video and audio lessons that present real estate exam topics in an easy-to-understand manner. (**)
What happens if you refuse an eminent domain?
Even if an owner declines an offer from the government to take back their property for the city’s use, the government still has the right to acquire it through a condemnation proceeding.
But if, after going through the legal process, the city is successful, the owner will still receive the fair market value for their property.
Is eminent domain a good thing?
Whether the eminent domain is a good thing or not would depend on whose perspective you are looking at.
The original and real purpose of the law of eminent domain is to acquire property for public use. This might include taking property to build highways, parks, and government buildings, which are beneficial to the public.
Another good side for eminent domain is the reassurance to the property owner that they will receive a “just compensation.”
But despite that, some owners may not prefer the “just compensation” over giving up their home due to its sentimental value. For instance, this could be their matrimonial home or the place where their kids grew up in.
In such cases, it is unfortunate that they cannot keep the property. But at the very least, they would receive fair compensation.
How long do eminent domain cases take?
In general, eminent domain proceedings can take up to two years to complete. But it also depends on the complexity of the negotiation between parties.
Is any type of property exempt from eminent domain?
As far as I know, there is no property exempt from eminent domain. Provided that the prerequisites have been met under the Constitution, the Federal, State, and local governments can take any property using eminent domain powers.
But course, this is given that the property owner receives just compensation at the fair market value.
What happens if eminent domain does not cover my mortgage?
Overall, your mortgage company typically has the right to receive any money from the acquisition before you, because you still owe them money for the property.
A competent lawyer can ensure that your lender doesn’t cause needless delays. They will also ensure that you are dealt with fairly throughout the eminent domain process.
A lot of home mortgages have a condemnation clause. The most common condemnation clause provides that the lender has the right to all profits in a condemnation proceeding, up to the amount owed on the home mortgage.
With this provision, your home lender can decide whether to take all or just a portion of the condemnation profits. However, it’s entirely up to the lender’s discretion. That is why you should review the loan document carefully with your mortgage broker before signing it.
If your home mortgage contract does not permit your mortgage lender to take all of the profits from your condemnation case, sell, it most likely has a provision that enables the lender to take some of the proceeds.
In any event, if the final offer ends up being less than what you owe on your mortgage, you can use the funds you receive to pay down your mortgage balance. Although you still need to pay back the shortfall, reduce the mortgage outstanding could help you to have a lower monthly payment, and save some interest expenses.
Frankly speaking, if the fair market value is not enough to pay off the mortgage balance, the Loan-to-Value ratio should be at a very high position.
This usually happens when you borrow too much against the property. Or the property value has decreased significantly after you bought it. (Well, many property owners have this experience during the 2008 housing crash.)
What is inverse condemnation?
Sometimes, surrounding owners feel as if their property value will be negatively impacted if the federal government or State has acquired surrounding properties through eminent domain.
In this scenario, those owners can request the city to purchase their properties as well. This process is typically referred to as “inverted condemnation.”
What is the difference between forfeiture and eminent domain?
I read several websites about this. Unlike eminent domain where you would receive a “just compensation,” you would not receive any compensation if your property is taken away due to forefeiture.
There are two types of forfeitures:
- Civil asset forfeiture
- Criminal asset forfeiture
Technically, civil asset forfeiture is a lawsuit by the government against an individual’s property. Civil asset forfeiture cases generally do not require a conviction or even criminal charges for the government to seize assets.
It can vary by jurisdiction, but overall, law enforcement just needs to show by a “preponderance of the evidence” that the seized property was involved in wrongdoings.
This legal standard is much lower than the one needed in criminal proceedings (i.e., beyond a reasonable doubt).
Even if the owner of the property sued to get their property back, there’s no assurance they’ll get their property back upon acquittal. Frequently, the seized property is sold at auctions.
What are some examples of eminent domain cases in US history?
The best way to understand eminent domain is to explore past legal cases. I tried to search for them online and found an interesting case study that happened back in 2005.
Eminent domain case study: Kelo v. City of New London
Here is a bit of the background story. In 2005, New London, a city in Connecticut, exercised its eminent domain authority to seize private property to sell to private developers, New London Development Corporation.
However, Susette Kelo, along with other owners in the area, refused to sell the property. Then the city had to commence a condemnation proceeding to force them to accept compensation.
Kelo took legal action against New London, and the matters went into Court. Her argument was that the condemnation of her property was an infraction of the “public usage” element of the Fifth Amendment because the land would be utilized for financial development.
In simple language, her viewpoint was that the acquisition was not 100% for public use, which did not entirely fit into the definition of the Fifth Amendment of the Taking Clause.
On the contrary, the city said developing the land would lead to job creation and increase tax revenues. Thus, it would benefit the public.
In the end, the Court ruled in a 5-4 decision in favor of the city and concluded that this case was not a violation of the Constitution.
The term “public use” could be broad
The Court highlighted that “public use” does not mean that the property has to be used solely for use by the public but could likewise describe public benefit or general public welfare.
If you go to the Oyez website, you could find an Opinion Announcement by Justice Stevens. It is a 4-minute audio clip that highlighted some important viewpoints why this case could serve the definition of “public use”.
Furthermore, if you want to have a thorough review of this case, you can also find a 1-hour audio clip of Oral Argument on the same page. I’ll leave the link in the reference section below.
“The city was not taking the land simply to benefit a certain group of private individuals, but was following an economic development plan. Such justifications for land takings, the majority argued, should be given deference. The takings here qualified as “public use” despite the fact that the land was not going to be used by the public. The Fifth Amendment did not require “literal” public use, the majority said, but the “broader and more natural interpretation of public use as ‘public purpose.'”
Quote from oyez.org/cases/2004/04-108
Here are other examples of eminent domain cases in U.S. history
Obviously, there were other cases that involved eminent domain. As I read an article from ThoughtCo, there had been seven most important eminent domain cases in U.S. history. Besides the Kelo v. City of New London case, the six others were:
- Kohl v United States (1875)
- United States v. Gettysburg Electric Railroad Company (1896)
- Chicago, Burlington & Quincy Railroad Co. v. City of Chicago (1897)
- Berman v Parker (1954)
- Penn Central Transportation Co. v. New York City (1978)
- Hawaii Housing Authority. v. Midkiff (1984)
As you could see, some of the cases happened in decades or even over a century ago. I chose to talk about the Kohl v. United States because that was the most recent eminent domain case that I could find.
Anyway, if you are interested in reading the other six cases, you could find more details on the JUSTIA US Supreme Court website. Once again, I’ll leave their links in the reference section.
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Final thoughts about eminent domain
Just a quick recap. There are two main requirements to exercise eminent domain, they are:
- It must be for “public use.”
- There must be “just compensation” to the real estate owner
As the property owner, you have three RIGHTS:
- The right to FAIR MARKET VALUE
- The right to have PROPER LEGAL REPRESENTATION
- The right to CHALLENGE
I believe the original intention of eminent domain is to ensure the public well being and development may continue, while private property owners would get compensated fairly.
I hope this article could help you get a better idea about eminent domain. Well, I certainly did learn a lot from writing this topic.
When choosing a real estate school, I prefer one where you could take the courses online. This way, you could study at your own pace whenever and wherever. The CE Shop is a trustworthy real estate education provider. You may click here to see whether they offer pre-licensing course in your state. (**)
Disclaimer: The information in this post is for general information only, and not intend to provide any advice. They are subjected to change without any notice, and not guaranteed to be error-free. Make sure you comply with the state laws and regulatory rules.
(**) Affiliate Disclosure: Please note that some of the links above are affiliate links, and at no additional cost to you. Our company, JCHQ Publishing will earn a commission if you decide to make a purchase after clicking on the link. Please understand that we include them based on our experience or the research on these companies or products, and we recommend them because they are helpful and useful, not because of the small commissions we make if you decide to buy something through the links. Please do not spend any money on these products unless you feel you need them or that they will help you achieve your goals.
Reference:
- Market Business News- What are property rights? (source)
- Interactive Constitution – The Fifth Amendment Takings Clause (source)
- FindLaw
- The United States Department of Justice – The World of Inverse Condemnation (source)
- Justia US Supreme Court
- Oyez – Kelo v New London (source)
- ThoughtCo – The 7 Most Important Eminent Domain Cases (source)
