Fair Market Value and Equitable Distribution
In the previous blog, we covered appraisal as a method of valuation of property in the context of Equitable Distribution in a separation. Equitable Distribution (ED) in North Carolina is a legal process by which the court divides the marital property between the parties. The three steps in an ED determination are classification, valuation, and distribution, and today we continue with a look at valuation.
There are many ways to value property. The method in which assets and debts are valued can differ, and some methods are preferred over other depending on the nature of an asset. Having covered appraisal, we will now discuss Fair Market Value. Take for instance, a car versus a business. Most cars (excluding rare, antique, or specialized cars) are a tangible and discrete item (as opposing to intellectual property) that can be assigned a value as to what people are willing to pay for it based on the milage, year, model, package, etc. A business can be more complicated, often requiring the use of an expert appraiser to look over internal financial documents as well as comparisons with other businesses out there. It might even factor in buildings and land that the business owns. Another major distinction is between real property (real estate, land) and personal property (such as a car, furniture, or even pets). So how does the court value those tangible personal properties?
North Carolina courts have defined Fair Market Value as “the price a willing buyer would pay to purchase the asset on the open market from a willing seller, with neither party being under any compulsion to complete the transaction.” Becker v. Becker, 127 N.C. App. 409, 414, 489 S.E.2d 909, 913 (1997). There is a bit to unpack in that sentence. As our courts have acknowledged, owners of property have a tendency to overvalue their property, but the definition clearly states that it is the price a willing buyer would pay when they are under no compulsion to purchase.
This means that any emotional connection to the property is not available to consider No willing buyer, for example, has an emotional connection to your couch. The court does not care if it was the couch your first-born learned to walk on. Attorneys may often explain this type of transaction as, what would someone pay for this property at a garage sale? Note that this does not include prices at a pawn shop or consignment store, as both of those have marked up prices due to the store owners needing to make a profit. Typically, you can think of fair market value as direct buyer to seller transactions. More substantial assets such as cars and boats have a robust secondary market in which prices are well established. There are tools your attorney can use to determine those values.