Real Estate Appraiser
01-21-2006, 04:21 PM
Highest and best use
The highest and best use in real estate appraisal is the use that will render the maximum fair market value of a particular property. That use must be legally allowable, physically possible, have demand in the marketplace, and result in the maximum value for the property. The test of highest and best use is given to a property both as if vacant and as improved.
For example, "House A" in a residentially zoned area may have a highest and best use as vacant and a highest and best use as improved that are both the same. A similar "House B" in a commercially zoned area may have a highest and best use as vacant as a commercial lot and ''highest and best use as improved as a a residence. If the value of the commercial lot as vacant in "House B" exceeds the value of house as a residence as improved plus demolition costs, the overall highest and best use of this property would be the as vacant value of a commercial lot. Since vacant lots are not improved, such properties are generally given only the as vacant test.
The highest and best use is critical to real property valuation since in order to value a property at its fair market value, comparable properties with similar highest and best uses must be examined. In the "House B" scenario, comparing that house to other houses that do not have a similar highest and best use would result in an inaccurate value opinion.
In the US, the legally permissible aspect of highest and best use is very important. In some locations, the governing jusrisdiction can use the "police power" concept to destroy illegally built improvements. This would obviously affect the market value of a property. This overall concept is logical, ie. a governing agency would be remiss to allow a toxic chemical plant to be built in the middle of a suburban area.
The highest and best use in real estate appraisal is the use that will render the maximum fair market value of a particular property. That use must be legally allowable, physically possible, have demand in the marketplace, and result in the maximum value for the property. The test of highest and best use is given to a property both as if vacant and as improved.
For example, "House A" in a residentially zoned area may have a highest and best use as vacant and a highest and best use as improved that are both the same. A similar "House B" in a commercially zoned area may have a highest and best use as vacant as a commercial lot and ''highest and best use as improved as a a residence. If the value of the commercial lot as vacant in "House B" exceeds the value of house as a residence as improved plus demolition costs, the overall highest and best use of this property would be the as vacant value of a commercial lot. Since vacant lots are not improved, such properties are generally given only the as vacant test.
The highest and best use is critical to real property valuation since in order to value a property at its fair market value, comparable properties with similar highest and best uses must be examined. In the "House B" scenario, comparing that house to other houses that do not have a similar highest and best use would result in an inaccurate value opinion.
In the US, the legally permissible aspect of highest and best use is very important. In some locations, the governing jusrisdiction can use the "police power" concept to destroy illegally built improvements. This would obviously affect the market value of a property. This overall concept is logical, ie. a governing agency would be remiss to allow a toxic chemical plant to be built in the middle of a suburban area.