Highest and Best Use

Highest and Best Use

Sometimes when a buyer is interested in purchasing real estate property, they would want to know if that property suits their needs such as location, profitability, and etc. “Highest and best use” is a term that is use frequently in real estate appraisals to help analyze and determine the market value of the property. It states that the value of the land, building or any real estate property is directly related to the use of that real estate property. It is the appraiser’s job to help the buyer and find the highest and best use.

Highest and best use is sometimes hard to determine or sometimes may change over time and because of this reason appraisers will evaluate the subject property from several alternative of usages including the buyer’s most and probable use. When the appraiser is analyzing the highest and best use for the subject property they use a two step procedure. The first step is to determine what the highest and best use is while the subject property is vacant and the second step is when the property is improved such as changes and/or modifications that may add or decrease the value of the property.

In order to even be considered as a possible choice for the highest and best use the selection must pass four tests:

1-Due to zoning, government interventions, building codes and other laws the first test asks if the selection is legally permissible.
2-The second test asks if the selection is even physically possible, for example the site may be too large or too small for the proposed idea.
3-The third test is a financial feasibility of the proposed use. The selection must justify the cost through profits.
4-The final test is maximally productive use. This means the selected use must create the highest profit to the buyer.

Most cases in real estate property that has existing usage that usage is probably the highest and best use, but in some cases it may not be. When existing usage shuns and lowers the value of the property, another option may be to demolish and redevelop the property. An appraiser must analyze the cost of this option.

Part of the appraiser’s job is to help a potential buyer to determine if the proposed idea would be profitable to the buyer in the subject property. In order to accomplish this, the appraiser will use several selective alternatives that has pass the four test to find the highest and best use for the subject property.