Highest And Best Use Example
Let's say, you're hired by an investor to find out the H&B Use of a property he's considering purchasing. The investor wants to know that if he buys this single family house, and then knocks down the house to build a four-family building; will a four-family be the H&B Use of the subject property?
From your field work and the data you have obtained, you make the following conclusions:
- Under The Current Use:
$40,000 = Site Value with the zoning for a single family house
$150,000 = Building + Site Value
- Under The Proposed Use:
$10,000 = Demolition Cost of the single family house
$180,000 = New Construction Cost of the four family house
$75,000 = New Site Value with the zoning for a four family house
$240,000 = New Construction Value of the four family house
The first step is to figure out the total loss in value for demolishing the existing improvements on the site. This is found by subtracting the current value of the building plus the site, from the current site value.
$150,000 - $40,000 = $110,000
The next step, is to figure out what the costs will be for everything from the demolition of the single family house, to the construction of the four-family house. We find this by adding the current value of the site, plus the loss in value for demolishing the single family house, plus the cost of this demolition, plus the cost to construct the new four-family house.
$40,000 + $110,000 + $10,000 + $180,000 = $340,000
Then we determine what the new value will be for the building plus the site with the four-family house on it. We find this by adding the new construction value plus the new site value with these improvements.
$240,000 + $75,000 = $315,000
We then subtract the value of the current site plus the current building, from the value of the new site plus the new building. The purpose of this is to learn what the added value will be with the four-family house built.
$315,000 - $150,000 = $165,000
The value added by this change in use is only $165,000. We have now found, that the cost to change the use of the site from a single family to a four-family is $340,000. The new total value of the site plus building will only be $315,000. This will give the investor a $25,000 loss if the change is made. Therefore, we can conclude that it's not the Highest and Best Use to change from the single family house to the four-family house. By making this change, it will cost the investor more money than he will gain in increased value when the conversion is all finished.