Standards Rule 1-3 states that “when necessary for credible assignment results in developing a market value opinion, an appraiser must develop an opinion of the highest and best use of the real estate.” and that STANDARDS RULE 2-2 (a)(x) states “when an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion.”
Full Answer
How is a property appraised in terms of its highest use?
A property must be appraised in terms of its highest and best use. The definition of highest and best use is as follows: The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
What does highest and best use mean in real estate?
Highest and best use is a real estate term for the most profitable possible use of a property. It does not take into account social or historical value, or non-financial benefits like open space. Nonetheless, it remains one useful way of deciding how to use a property. Here’s everything you need to know about highest and best use in real estate.
What is the highest and Best Use of a site?
The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. When a site contains improvements, the highest and best use may be determined to be different from the existing use.
What is the highest and best use as improved analysis?
An analysis related to the highest and best use as improved is applicable if the property is improved, or slated for new construction. This analysis seeks to identify the highest and best use of the property while taking into account the existing or proposed improvements.
What is the highest and best use called?
Highest and best use, defined According to The Appraisal Institute the highest and best use of a property is defined as: The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value.
What is an example of highest and best use?
For example, assume that "House B" has a value as a house of $200,000, and a site value as a commercial lot of $250,000 with a cost to demolish the house and prepare the site at $25,000. The highest and best use of the site is to demolish the house and sell the site as a commercial lot.
Which is the final step in determining highest and best use?
Maximally Productive This final step of determining the highest and best use of a property will take all of the potential uses and rank them in order of highest value or return on investment. While ranking the potential uses, it is crucial that the risks involved are also considered.
How do you determine the highest and best use of land?
Here's a breakdown of the four criteria that Highest and Best Use must meet.Physically possible. You must consider the size, shape, topography, and accessibility of the site when determining if it is physically possible. ... Legally permissible. ... Financially feasible. ... Maximally productive.
What is highest and best use study?
A highest and best use study seeks to identify which use would bring maximum value to a piece of vacant land or an improved parcel. A highest and best use analysis for a given property must meet certain criteria that flow in sequential order. The order is generally: Legally permissible.
What is the first test of highest and best use?
The four tests of highest and best use are: (1) legally permissible (2) physically possible (3) financially feasible and (4) most profitable. The first two tests are interchangeable in order and, in many circumstances, the last two are combined.
When considering the highest and best use an appraiser must consider what is?
A property must be appraised in terms of its highest and best use. The definition of highest and best use is as follows: The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
What is the typical result when an improvement does not represent the highest and best use of the land as vacant?
What is the typical result when an improvement does not represent the highest and best use of the land as vacant? Usually, the regulating municipality will permit a non-conforming use to continue, but will limit the owner's ability to expand the use or to rebuild the structure if it is damaged or destroyed.
Why is an analysis of highest and best use of a property important?
3: “Estimating the highest and best use of a property is a critical appraisal component that provides valuation context within which market participants and appraisers select the valuation context within which market participants and appraisers select comparable market information.”
What does highest and best offer mean?
“Highest and best” means that the seller has multiple offers and doesn't wish to negotiate. Instead, they want to get final offers from each buyer, with their highest offer and best terms, so they can compare and pick one.
What is the principle behind highest and best use quizlet?
The highest and best use is a recognized theory used in conjunction with the appraisal process. This theory is founded in the correlation between the highest probable value of the property and its highest and best use to attain the highest return on the owner's original investment.
What is the highest and best use of a property quizlet?
the highest and best use of a property must be one that is: (1) Legally permissible: the use must comply with laws, regulations, and ordinances. (2) Physically possible: the use must be consistent with the site characteristics and physical features of the property.
What is highest and best use quizlet?
The highest and best use is a recognized theory used in conjunction with the appraisal process. This theory is founded in the correlation between the highest probable value of the property and its highest and best use to attain the highest return on the owner's original investment.
What is the highest and best use of a property quizlet?
the highest and best use of a property must be one that is: (1) Legally permissible: the use must comply with laws, regulations, and ordinances. (2) Physically possible: the use must be consistent with the site characteristics and physical features of the property.
When considering the highest and best use an appraiser must consider what is?
A property must be appraised in terms of its highest and best use. The definition of highest and best use is as follows: The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
Why is highest and best use important?
Most appraisers agree that the highest and best use analysis is an integral component of their toolkit. This analysis allows appraisers to understand what form of development will be most profitable at the site and even accounts for adaptations within legal limitations.
What is the highest and best use?
The definition of highest and best use is as follows: The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
When a site contains improvements, the highest and best use may be determined to be different from the existing use?
Implied in this definition is that the determination of highest and best use takes into account the contribution of a specific use to the community and community development goals, as well as the benefits of that use to individual property owners.
What is the implication of the use determined from analysis?
An additional implication is that the determination of highest and best use results from the appraiser's judgment and analytical skills; that is, the use determined from analysis represents an opinion, not a fact to be found.
When can an appraiser apply the appropriate approaches to value?
Once the highest and best use has been determined, the appraiser can then apply the appropriate approaches to value.
Is improved land purely speculative?
Determination of the type and intensity of the improvement to be placed on the investor's land often requires an after-tax return analysis of various alternatives. Land or improved property that has resale profit as its principal potential benefit is purely speculative. The price such land commands in the market reflects the real motivation of the purchaser/speculator.
What is the meaning of "use that creates the greatest return"?
It is that use, chosen from among reasonably probable and legal alternative uses, which is found to be physically possible, appropriately supported, and financially feasible to result in the highest and best use. ". "The use that creates the greatest return.".
What is the highest and best use of land?
Each of these definitions identifies that the highest and best use has several contributing parts. The use must be legally permissible, physically possible, and financially feasible with the appraiser being able to support each of these contribution factors. The land and the improvements must be able to produce the greatest value and create the greatest return as of a specific date in time. Even though all of the definitions specifically mention the property, initially the highest and best use essentially refers to the land, or site. The improvements may or may not actually contribute to the highest and best use of the land area.
What should an appraiser consider when evaluating a property?
The appraiser's highest and best use analysis of the subject property should consider the property as it is improved. This treatment recognizes that the existing improvements should continue in use until it is financially feasible to remove the dwelling and build a new one, or to renovate the existing dwelling. If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use."
What does an appraiser do?
The appraiser will have to analyze the requirements for the highest and best use of the land, and further testing may be necessary for a final determination.
How do improvements affect land value?
The improvements are normally valued for their contributory value relative to the highest and best use of the land . In most residential appraisal assignments, the land is already improved with some sort of building. The appraiser will determine, through an inferred analysis of the market, whether the present improvements actually contribute to the overall highest and best use of the land area.
What is the first analysis?
The first analysis is the inferred analysis of the relationship between the supply and the demand for a site's particular highest and best use. Is there a need or demand for this use of the land? How many other similarly used land areas are there in the market area? Can the market support another land use of this type? The appraiser will reflect on the principle of competition.
How is the value of land determined?
The market value of the land is always determined by its highest and best use. The land's highest and best use may be limited due to several factors which we already know to be either governmental or private restrictions (legal). The value of the land is enhanced by location and utility (physical).
Who published Market Analysis and Highest and Best Use?from appraisersblogs.com
Market Analysis and Highest and Best Use, published by Hondros Learning, states the following on page 12:
What to do if appraisal is higher than purchase price?from thetruthaboutmortgage.com
If your appraisal comes in higher than the purchase price, give yourself a pat on the back and breathe out. You’ve cleared one major hurdle in the mortgage process. However, your lender isn’t going to let you borrow more because of it. Remember, they’ll use the lower of the sales price or appraised value.
How much does a home appraisal cost?from thetruthaboutmortgage.com
The cost of a home appraisal can vary. Based on property type, location, and size. And by bank and mortgage lender. But most range from $300 to $600. Often when you apply for a mortgage, a deposit is requested by the lender early on to cover the cost of the appraisal.
What is the most common type of appraisal for a residential property?from thetruthaboutmortgage.com
The most common type of appraisal for a residential property is the Uniform Residential Appraisal Report, or URAR.
What is the 4th edition of Appraising Residential Properties?from appraisersblogs.com
Appraising Residential Properties, 4th Edition contains discussions of “neighborhood” and “market area” on pages 36, 78 and 198. The statements contained therein indicate that data and analysis related to a neighborhood is broad and general in nature, whereas data and analysis related to a market area is specific and related to a particular property type or category. Some of the statements appear below ( bold added for emphasis).
What section of the appraisal should be reported separately?from appraisersblogs.com
Section XI , 403.07. “The appraiser should report separately the percentage of developed one-family sites, developed two-family to four-family sites, etc. Undeveloped land should be reported as vacant. In addition, if there is a significant amount of vacant or undeveloped land in the neighborhood, the appraiser should include comments to that effect to ensure that he or she adequately describes the neighborhood.”
What does an appraiser do?from thetruthaboutmortgage.com
An appraiser will visit your home to determine its condition
Why is the highest and best use important in the appraisal process?
Why is the highest and best use so important in the appraisal process? It is because the highest and best use determines the most profitable use of the site, whether the subject is vacant land or an improved property on the site.
What is the highest and best use of land?
The Fifth Edition of The Dictionary of Real Estate Appraisal by the Appraisal Institute defines highest and best use as: The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible and that results in the highest value. Most textbooks don’t mention “appropriately supported” as part of the highest and best use definition. The Uniform Standards of Professional Appraisal Practice (USPAP) does not have a definition for highest and best use. However, if an appraisal report is prepared, it requires the appraiser to summarize the support and rationale for that opinion.
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What does a commercial appraiser need to know about vacant commercial property?
A commercial appraiser valuing a vacant commercial lot on a corner of a busy intersection needs to consider what type of commercial property should be built and its most profitable use. For a commercial appraiser, the highest and best use conclusion is more specific as to the type of improvement that should be built (retail, office, fast food restaurant, service station, etc.). Again, this would require an analysis of the net operating income for each potential building that can be legally and physically constructed on the site.
What is the best use conclusion for an existing house?
In this case, your highest and best use conclusion would indicate that you utilize the sales comparison approach with other, older single family residences. However, if the existing house is past its prime and has zero remaining economic life, it still may have a useful life to the homeowner even though the improvements don’t contribute to the overall value of the property.
What is the most profitable use?
Most Profitable. The most profitable use generally pertains to commercial properties. The bottom line is what would be the highest net income for a proposed structure. Determining the most profitable use might require a market analysis or a feasibility study.
Is an improved structure always its highest and best use?
The highest and best use usually requires less analysis when appraising an existing property rather than a proposed property. However, an improved structure is not always its highest and best use.
What is the highest and best use?from propertymetrics.com
the land was classified preceding such change of use, had such real estate been assessed at its highest and best use ..." It is the concept in real estate appraisal that shows how the highest value for a property is arrived at. In any case where the market value of real property is sought, that value must be based on its highest and best use. Highest and best use is always that use that would produce the highest value for a property, regardless of its actual current use.
What is the first test of highest and best use?from propertymetrics.com
The first test of highest and best use simply evaluates whether it is possible to use the land in a certain way. Ignoring the zoning and economics of the proposal, consider whether or not the potential use is physically possible. That means the topography, soil type and conditions, lot size and shape, surface and subsurface water, ...
How to determine if a project is financially feasible?from propertymetrics.com
To address whether a proposed use is financially feasible, you need to conduct a market analysis and develop proforma cash flow estimates. You’ll need to collect data in order to forecast construction and development expenses, operating expenses, rents, absorption rates, vacancy rates, discount rates, cap rates, and residual values. Once you’ve gathered all of this information, you will estimate the proforma net operating income over your expected holding period. Employing discounted cash flow techniques, you can determine which projects meet your particular investment standards. Discounting cash flows by your cost of capital and computing the net present value, a project is considered financially feasible if the NPV is greater than 0. You can also compute the internal rate of return and compare the property’s return to your acceptable hurdle rate for projects. Only the proposed property uses that meet these criteria for being financially feasible move to the next step of the analysis.
What is HBU in real estate?from en.wikipedia.org
HBU is a designation to identify an entity that could have a higher value if used for a different purpose. There are many other similar concepts that are used in fields related to, yet outside of real estate appraisal as instructed in the Uniform Standards of Professional Appraisal Practice (USPAP). One example is Higher and Better Use (HBU), as explained below. According to an article prepared by an entity working with the US Fish and Wildlife Service, which was posted on the United States Fish and Wildlife Service website:
How many tests can an appraiser use?from propertymetrics.com
The Appraisal Institute has four tests that appraisers can use in order to narrow down all of the alternatives to one highest and best use of the property. Four Tests for Highest and Best Use. You can use the following four tests to find the highest and best use of a site as if vacant or currently improved.
What is the maximally productive use?from en.wikipedia.org
Maximally productive use. Finally, the use must generate the highest net return (profit) to the developer. A property that could hypothetically be developed with residential, commercial or industrial development might only have one of those uses as its highest and best use.
What are short term constraints on availability of capital and labour?from en.wikipedia.org
In reality, short term constraints on availability of capital and labour, inevitable conflicts between the other key factors, as well as the predisposition and experience of the developers, often lead to developments that are not maximally productive, but are a compromise. They are productive enough and safe enough that the developer proceeds, but they are not maximally productive. James Graaskamp fully developed a model that reflects this reality more clearly, and termed it most probable use .
What is the highest and best use?from duncanbrown.com
the land was classified preceding such change of use, had such real estate been assessed at its highest and best use ..." It is the concept in real estate appraisal that shows how the highest value for a property is arrived at. In any case where the market value of real property is sought, that value must be based on its highest and best use. Highest and best use is always that use that would produce the highest value for a property, regardless of its actual current use.
Which scenario results in the highest net return to the developer?from en.wikipedia.org
As the examples illustrate, even though the retail development results in the overall highest market value for the development, the residential development scenario results in the highest net return to the developer and this makes it the maximally productive use.
What is HBU in real estate?from en.wikipedia.org
HBU is a designation to identify an entity that could have a higher value if used for a different purpose. There are many other similar concepts that are used in fields related to, yet outside of real estate appraisal as instructed in the Uniform Standards of Professional Appraisal Practice (USPAP). One example is Higher and Better Use (HBU), as explained below. According to an article prepared by an entity working with the US Fish and Wildlife Service, which was posted on the United States Fish and Wildlife Service website:
What is the maximally productive use?from en.wikipedia.org
Maximally productive use. Finally, the use must generate the highest net return (profit) to the developer. A property that could hypothetically be developed with residential, commercial or industrial development might only have one of those uses as its highest and best use.
What is the implication of the use determined from analysis?from duncanbrown.com
An additional implication is that the determination of highest and best use results from the appraiser's judgment and analytical skills; that is, the use determined from analysis represents an opinion, not a fact to be found.
What determines the highest and best use of a property?from en.wikipedia.org
The highest and best use of a property determines its utility to a potential purchaser. A purchaser will pay no more for a property than a competing property with the same utility would command, while a seller would accept no less than another seller of a comparable property.
What would be the highest and best use of a property if the demolition cost rose to $55,000?from en.wikipedia.org
However, if the demolition costs rose to $55,000, the highest and best use would be the existing residential use, because the value as a commercial lot (now $195,000) would not exceed the existing value as a residence. This would be the highest and best use of the property, even though it is contrary to what actually exists.
What is the highest and best use of a property?
The Highest and Best Use of a property refers to the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value. A highest and best use study seeks to identify which use would bring maximum value ...
What services do we offer for the highest and best use?
Some related services to a highest and best use studies that we offer are market analyses, marketability analyses, feasibility studies and valuation consultation.
How to find residual land value?
Firstly, it can be found by estimating the value of the proposed use (land and building- what it will be worth when complete), and subtracting all development costs including labor, hard costs and profit. The remaining value is the residual land value.
What are the questions asked in a property appraisal?
These relate to the following questions: 1 Should the existing improvements on the property be maintained in their current state, should they be altered in some manner to make them more valuable, or should they be demolished to create a vacant site for a different use? 2 If renovation or redevelopment is warranted, when should the new improvements be built?
Is real estate vacant or improved?
As Improved. Most real estate is either vacant (land) or improved with one or more buildings. As a result, highest and best use analyses are divided into two subcategories: An analysis related to the highest and best use as vacant seeks to identify the highest and best use of the land as if it were available for development.
Is the residual land value determined as a result of the analysis absolute or certified?
It is important to understand that if an appraiser is developing a stand-along highest and best use study of the land as though vacant, or even if it is a subsection of an appraisal, the residual land value determined as a result of the analysis may not be absolute, nor certified. Rather, it is used to compare relative alternatives ...
What is the highest and best use?
the land was classified preceding such change of use, had such real estate been assessed at its highest and best use ..." It is the concept in real estate appraisal that shows how the highest value for a property is arrived at. In any case where the market value of real property is sought, that value must be based on its highest and best use. Highest and best use is always that use that would produce the highest value for a property, regardless of its actual current use.
Which scenario results in the highest net return to the developer?
As the examples illustrate, even though the retail development results in the overall highest market value for the development, the residential development scenario results in the highest net return to the developer and this makes it the maximally productive use.
What is HBU in real estate?
HBU is a designation to identify an entity that could have a higher value if used for a different purpose. There are many other similar concepts that are used in fields related to, yet outside of real estate appraisal as instructed in the Uniform Standards of Professional Appraisal Practice (USPAP). One example is Higher and Better Use (HBU), as explained below. According to an article prepared by an entity working with the US Fish and Wildlife Service, which was posted on the United States Fish and Wildlife Service website:
What is the maximally productive use?
Maximally productive use. Finally, the use must generate the highest net return (profit) to the developer. A property that could hypothetically be developed with residential, commercial or industrial development might only have one of those uses as its highest and best use.
What are short term constraints on availability of capital and labour?
In reality, short term constraints on availability of capital and labour, inevitable conflicts between the other key factors, as well as the predisposition and experience of the developers, often lead to developments that are not maximally productive, but are a compromise. They are productive enough and safe enough that the developer proceeds, but they are not maximally productive. James Graaskamp fully developed a model that reflects this reality more clearly, and termed it most probable use .
What determines the highest and best use of a property?
The highest and best use of a property determines its utility to a potential purchaser. A purchaser will pay no more for a property than a competing property with the same utility would command, while a seller would accept no less than another seller of a comparable property.
What would be the highest and best use of a property if the demolition cost rose to $55,000?
However, if the demolition costs rose to $55,000, the highest and best use would be the existing residential use, because the value as a commercial lot (now $195,000) would not exceed the existing value as a residence. This would be the highest and best use of the property, even though it is contrary to what actually exists.
What is the highest and best use?from en.wikipedia.org
the land was classified preceding such change of use, had such real estate been assessed at its highest and best use ..." It is the concept in real estate appraisal that shows how the highest value for a property is arrived at. In any case where the market value of real property is sought, that value must be based on its highest and best use. Highest and best use is always that use that would produce the highest value for a property, regardless of its actual current use.
What is the first test of highest and best use?from propertymetrics.com
The first test of highest and best use simply evaluates whether it is possible to use the land in a certain way. Ignoring the zoning and economics of the proposal, consider whether or not the potential use is physically possible. That means the topography, soil type and conditions, lot size and shape, surface and subsurface water, ...
How to determine if a project is financially feasible?from propertymetrics.com
To address whether a proposed use is financially feasible, you need to conduct a market analysis and develop proforma cash flow estimates. You’ll need to collect data in order to forecast construction and development expenses, operating expenses, rents, absorption rates, vacancy rates, discount rates, cap rates, and residual values. Once you’ve gathered all of this information, you will estimate the proforma net operating income over your expected holding period. Employing discounted cash flow techniques, you can determine which projects meet your particular investment standards. Discounting cash flows by your cost of capital and computing the net present value, a project is considered financially feasible if the NPV is greater than 0. You can also compute the internal rate of return and compare the property’s return to your acceptable hurdle rate for projects. Only the proposed property uses that meet these criteria for being financially feasible move to the next step of the analysis.
What is HBU in real estate?from en.wikipedia.org
HBU is a designation to identify an entity that could have a higher value if used for a different purpose. There are many other similar concepts that are used in fields related to, yet outside of real estate appraisal as instructed in the Uniform Standards of Professional Appraisal Practice (USPAP). One example is Higher and Better Use (HBU), as explained below. According to an article prepared by an entity working with the US Fish and Wildlife Service, which was posted on the United States Fish and Wildlife Service website:
How many tests can an appraiser use?from propertymetrics.com
The Appraisal Institute has four tests that appraisers can use in order to narrow down all of the alternatives to one highest and best use of the property. Four Tests for Highest and Best Use. You can use the following four tests to find the highest and best use of a site as if vacant or currently improved.
What is the maximally productive use?from en.wikipedia.org
Maximally productive use. Finally, the use must generate the highest net return (profit) to the developer. A property that could hypothetically be developed with residential, commercial or industrial development might only have one of those uses as its highest and best use.
What are short term constraints on availability of capital and labour?from en.wikipedia.org
In reality, short term constraints on availability of capital and labour, inevitable conflicts between the other key factors, as well as the predisposition and experience of the developers, often lead to developments that are not maximally productive, but are a compromise. They are productive enough and safe enough that the developer proceeds, but they are not maximally productive. James Graaskamp fully developed a model that reflects this reality more clearly, and termed it most probable use .
