The Highest And Best Use
You value property in relation to its Highest and Best Use. This may not always be its present use and the property's H&B Use can change over time. The H&B Use is based upon all factors, such as, the neighborhood data, market data, zoning, etc. The Highest and Best Use of a property is the most profitable, likely use to which a property can be put. Consider it as the use in which a property is put which will give the highest value to the site. Market Value is always estimated by the Highest and Best Use for the subject property and the Date of the appraisal. Highest and Best Use is one of the most critical factors in all appraisals. The "As Of " date of the appraisal is the other critical factor. H&B Use and the "As Of" date, are the two factors that the entire appraisal is based upon.
Highest and Best Use is one of the most CRITICAL factors in all appraisals. The "As Of " date of the appraisal is the other critical factor. H&B Use and the "As Of" date, are the two factors that the entire appraisal is based upon.
The type of improvement that someone puts on the site must yield the most value for it to be the H&B Use of that property. For example, if you build a single family house in an area mostly of four-family buildings, then the single family house is probably not the H&B Use of that site. The type of improvement must conform to the approved zoning for the site in order for it to be the H&B Use. Let's say you converted a single family home into a two-family house by separating the first and second floors to create two apartments. If the local zoning doesn't allow a two-family house on that site, then it cannot be the H&B Use of the property. Potential buyers will not want to purchase a property if it violates the zoning laws.
In the H&B Use, land is always residual. To estimate the land value by using a residual technique, you have to take sales comps and estimate the cost of only constructing the building. After that, you must take out for any depreciation that affected the sale. What you're left with is a residual value for the vacant land which is an estimate of the land value.
- To determine the highest and best use, you need to have all of the following factors:
1. It must be a legally permitted use for the property. For example, let's say you're appraising a single family house. What if the zoning on the property states it can be used for a one-family or a two-family dwelling. If two-family houses are worth more money in that area, then you may determine that the highest and best use is a two-family. That is, if it is feasible for the house to be converted to a two-family. However, if the zoning is for a single family house only, then you cannot estimate the value based upon the possible conversion to a two-family house. That is, unless the conversion could be done without any extensive zoning changes.
2. It must be a physically possible use for the property. For example, let's say you're appraising a two-family house that has a frame construction. Frame construction means that the walls of the house are made of wood materials and not masonry materials, like brick or stone. The zoning on the property may state that it can be used for a two-family frame dwelling or a four-family masonry dwelling. What if four-family houses are worth more money in that area. If this were the case, then you cannot decide that the highest and best use is a four-family. That is, unless you calculate into your analysis the cost of knocking down the existing frame house, and building a new four-family masonry structure.
3. It must be an appropriately supported use for the property. For example, let's say you're appraising a vacant lot in a forest area. We'll assume that you want to determine if the H&B Use is a single family house as opposed to the current vacant lot. You would have to be able to get utility lines to the property and have some roadways providing access to it, in order to decide that the highest and best use is a single family house.
4. It must be an economically feasible use of the property. For example, let's say you're appraising a one family house and you want to find out if the highest and best use is a three-family house. You would need to evaluate the following:
You must learn if a three-family house is marketable in the subject area. Marketability is determined by: the quality of the space (demand for the real estate); the quantity of the space (supply of other houses on the market for sale); the location of the real estate; and any special conditions that will enhance the marketability.
You must find out if a three-family house meets a typical investor's criteria. One requirement it would have to meet would be an adequate rent roll or appreciation to provide a good return on their money invested in the property.