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Highest and Best Use

When the purpose of an appraisal is to estimate market value, highest and best use analysis identifies the most profitable, competitive use to which the property can be put. One major objective of property analysis is to develop a conclusion about the highest and best, or most probable, use of the site and of the improved property. Highest and best use reflects a basic assumption about real estate market behavior—that the price a buyer will pay or a seller will accept for a property is based on his or her own conclusion about the most profitable use of the site or property.

Highest and best use may be defined as "the reasonably probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value."

Because the use of land can be limited by the presence of improvements, highest and best use is determined separately for the land or site as though vacant and available to be put to its highest and best use and for the property as improved. The first determination (highest and best use of land as though vacant) reflects the fact that land value is derived from potential land use. The second determination (highest and best use of property as improved) refers to the optimum use that could be made of the property considering the existing improvements. The highest and best use of the improved property may or may not be the same as the highest and best use of the site.

Highest and best use of land as though vacant:

Because many appraisals include an allocation of property value between land and improvements, a highest and best use analysis of the land as though vacant is performed.

The questions to be answered in this analysis are:

1. If the land is, or were, vacant what use should be made of it?
2. What type of improvement, if any, should be put on the land and when?

Land value can be based on potential, rather than actual, use. This is the basis for the cost approach.

In the analysis of highest and best use, appraisers must consider not only the suitability of the site for existing or proposed use but also its suitability for alternative uses. They must determine the use that will produce the highest present worth of the site. This determination is used later in the appraisal analysis to ascertain what contribution the improvements are making to the value of the total property

Highest and best use of property as improved

The highest and best use of property as improved is analyzed for two reasons. The first is to identify the property use that can be expected to produce the highest overall return for each dollar of capital invested. The second reason to estimate the highest and best use of property as improved is to help identify comparable properties. Both the highest and best use of land as though vacant and property as improved should be the same or similar for each comparable property as for the subject property.

Highest and best use of the property always takes into consideration existing improvements. When there are existing improvements, the highest and best use of the site may be different from that of the improved property. For property valuation purposes, the applicable highest and best use is that of the improved property, which always includes retention and use of existing improvements.