Highest & Best Use: Analysis & Application

Instructor: Amy Agee
In this lesson, you'll learn how to analyze and apply highest and best use property values as determined by the market/marketability and property type.

What Is Highest and Best Use?

Valuing a property with the concentration of what the property could become to achieve the highest form of profitability is called highest and best use. A property's existing condition and usage should be of minor consideration unless the conclusion indicates the property is already at its highest and best use.

To assess the highest and best use value analysis for a property requires extensive knowledge of the market area, potential market growth, zoning and property type. Using research methods such as visual inspection, viewing recent building permits and acquisitions of nearby properties to determine potential growth in an area is the first step.

Being familiar with zoning regulations is equally important to determine what the property's highest and best usage may be. For example, is the property suited for industrial, commercial retail or new residential developments? To find the highest and best use, careful consideration must be given to conclude if the recommendation for property improvement is financially feasible and will be profitable.

Analyzing Vacant Land

Regardless of property type, the approach to determine highest and best use is the same. When analyzing vacant land, the amount of land and how it is zoned are two important factors. One acre of vacant land in a prime commercial district may be as valuable as 100 acres in a rural area. Perhaps the vacant land is located in an older neighborhood with newly developing commercial improvements nearby. If this is the case, you need to take into consideration that new commercial growth could expand to the area of the vacant land. It may be beneficial for the landowner to delay selling until it is evident that the growth will move toward the parcel of land which will increase the value.

Analyzing Improved Properties

Imagine that you have accepted an assignment in a great area with high property values. Expecting to pull up to a high value home, you find yourself in amazement when it turns out to be a 70-year-old home with neon green exterior paint and a roof that has caved in. How could this property in this area have any value compared to the surrounding area? This could turn out to be a great opportunity for a contractor, investor or home improvement professional. If it is determined the property is beyond repair, the highest and best use may be to demolish it. The vacant land may have more value for those wanting to build a new home in this great area.

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