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
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.
The income approach estimates a property's value based on the income it generates by converting net operating income into a value estimate using a capitalization rate. It is the preferred method for income-producing properties.
The comparable sales approach estimates a property's value by comparing it to similar properties that have recently sold in the same market area. It is the most widely used and reliable approach for appraising residential properties.
The cost approach estimates a property's value by calculating the current cost to rebuild the improvements, subtracting accumulated depreciation, and adding the land value. It is most reliable for new construction and special-purpose properties.
Reconciliation is the final step in the appraisal process where the appraiser analyzes the value indications from all applicable approaches and arrives at a single final opinion of value. It is not a simple average of the three values.
Frequently Asked Questions
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