Highest and Best Use
Definition
Highest and best use is an appraisal concept that identifies the most profitable, legally permitted, physically possible, and financially feasible use of a property. It is the foundation of all property valuation.
Example
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.
Exam Tip
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 Valuation Terms
Depreciation of Investment Property
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.
Income Approach
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.
Comparable Sales Approach
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.
Cost Approach
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 in Appraisal
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.
Property Tax Exemptions and Relief Programs
Various programs and exemptions exist to reduce the property tax burden for specific groups, such as seniors, homesteaders, or veterans.
Frequently Asked Questions
Test Your Valuation Knowledge
Practice with exam-style questions to make sure you can apply Highest and Best Use and other valuation concepts.