The highest and best use analysis requires that a proposed use meet all four criteria simultaneously: legally permissible, physically possible, financially feasible, and maximally productive. The analysis is performed twice—once for the land as though vacant and once for the property as improved. A property's current use is not necessarily its highest and best use, but the current use is presumed unless the value of the land as vacant exceeds the value as improved.
An appraiser evaluating a single-family home on a commercially zoned lot near a busy intersection might determine that the highest and best use is commercial development rather than residential use. If the vacant land value exceeds the value of the property with the existing home, the highest and best use would be to demolish and develop commercially.
This is a heavily tested appraisal concept. Remember the four tests: legally permissible, physically possible, financially feasible, and maximally productive. All four must be met simultaneously. A common exam trick presents a use that is highly profitable but not legally permitted—that cannot be the highest and best use.
Related Terms
Related Concepts
A transfer tax is a tax imposed on the transfer of ownership of real estate.
Various programs and exemptions exist to reduce the property tax burden for specific groups, such as seniors, homesteaders, or veterans.
Depreciation is an accounting method of allocating the cost of an asset over its useful life, allowing investors to deduct a portion of the asset's cost each year.
Many states have laws to limit how much property taxes can increase each year, regardless of market value fluctuations.
Homestead portability allows homeowners to transfer a portion of their accumulated homestead tax savings to a new homestead in the same state.
Frequently Asked Questions
Study This in Your State
Highest and Best Use may have state-specific rules. Choose your state to study Valuation with localized content: