Just compensation is a right enshrined in the Fifth Amendment to the U.S. Constitution (and counterpart state constitutions), which is invoked whenever private property is taken by the government. Under some state constitutions, it is also owed when the government "damages" private property.

Usually, the government files an eminent domain action to take private property for public use and just compensation is determined at trial if the landowner does not settle with the government. However, when the government fails to file an eminent domain action and pay for the taking, the owner may seek compensation in an action called inverse condemnation.

For reasons of expedience, courts generally use fair market value as the measure of just compensation. The primary evidence of fair market value in almost all eminent domain are appraisal reports created by the appraisers hired by both sides. Because of the difficulty in stopping the eminent domain process, and the sole issue typically being what just compensation is owed to a landowner, an eminent domain trial is often called a "battle of the appraisers."

Estimating just compensation, generally

Market value is the prevailing, but not exclusive measure of determining the just compensation owed to a landowner under the Fifth Amendment. Fair Market Value is defined by appraisers as the most probable price, in terms of cash that would be paid by a willing buyer to a willing seller, each being fully informed of the property's good and bad features, with the property being exposed on the market for an adequate time to attract offers. But in eminent domain cases, fair market value is defined as the highest price obtainable in the open market with the value not being influenced by the imminence of the eminent domain taking. In other words, the property must be valued as if the project for which it is being taken did not exist — this is known as the "project influence" doctrine.

Market value does not include incidental losses (e.g., cost of moving), but some of these losses are made compensable in part by statutes, such as the federal Uniform Relocation Assistance Act (Code of Federal Regulations 49) and its state counterparts. As for business losses, the Supreme Court has held that an "exercise of the power of eminent domain which has the inevitable effect of depriving the owner of the going-concern value of his business is a compensable 'taking' of property." Nevertheless, many lower courts deny compensation for business losses on the theory that such losses are "speculative" or that the fair market value of the land should already account for the value of a business located on the land. The judicial denial of compensation for business losses inflicted when a business conducted on the taken land is destroyed by the taking, has been the subject of much controversy and severe criticism by legal commentators. Alaska, Minnesota, New Mexico, and Pennsylvania, allow for recovery of business losses. Moreover, property owners are always entitled to receive interest on the just compensation owed to them if the payment is delayed.

Appraisals

Because eminent domain is difficult to prevent, in almost all eminent domain cases, the only issue to be determined at trial is the just compensation owed to the landowner and which party's appraisal of the condemned property is more credible. Accordingly, an eminent domain trial is often seen as a "battle of appraisers" because appraisals, as expressions of opinion, can vary dramatically for any given property. Although their valuations may be different, the appraisers for the condemnor and the condemnee both follow the same three-step process:

  1. Determine the highest and best use of the property before determining the property's value;
  2. Determine which appraisal methodology is most appropriate to use given the characteristics of the property or whether the appraiser should use more than one methodology; and
  3. Come to an opinion on the fair market value of the property based on the methodology or methodologies used. It is defined as "the reasonably probable use of property that results in the highest value." The determination of the highest and best use for the condemned property is the guidepost for an appraiser's determination of its value, dictating what methodologies they use in their appraisal.

The adjustments made are both quantitative and qualitative. Appraisers use several statistical or data analysis techniques to make the quantitative adjustments such as: variants of sensitivity analysis (e.g., paired or grouped data analysis), trend analysis, scenario analysis, and capitalization of income differences. For these reasons, appraisers may create hybrid or novel approaches to use in their appraisals for an eminent domain (or inverse condemnation) case.