I know of a home that sold in a neighborhood with homes in the high $300k to $400k range - for over $500k. The buyer had to have this beautifully upgraded home and found it to be a "fair" price. These same homes originally sold in the high $150's.
The buyer was the market for this particular home and lived happily ever after.... Moral of the story: There is a buyer out there for every property on the market - we just have to find them.
If none of these issues play out then obtain the help of an appraisser or Real estate pro to help judge a proper price range. Last and not least if the value is there don't begrudge the seller their due appreciation of value or the great purchase they made.
What a person paid for the property is not necessarily a deciding factor for what you should offer. As long as the house is priced based on market value, that is what the house is worth. A house is only worth market value, so if the market dictates the house is worth $59 than that is fair market value. Unfortuantely sometimes buyers get stuck on what the seller paid for the house as opposed to market trend. An apprasier will also justify the value. IF however, the market dictates the house is worth $40, than by all means offer the $40.
It is your money, your checkbook, your decision. "Fair" to me means....that which is equally agreed upon by all parties of a transaction. "Location, Higest and Best Use, Economic Contribution," and so may other factors are needed to "fairly" answer the question. Real Estate is a business of negociating. Remember when working with a REALTOR, you are with a partner who, has taken as oath to have your "best interests" as the primary factor in that negociation towards, "fair."
Hope this helps.