what are the four tests for highest and best use

The Four Tests of Highest and Best Use

• 1. Physically possible You must consider the size, shape, topography, and accessibility of the site when determining if it is physically possible. Some questions to answer: ...
• 2. Legally permissible You must consider whether any zoning issues or restrictions will prevent building on or improving the lot. Some questions to answer: ...
• 3. Financially feasible ...
• 4. Maximally productive ...

Full Answer

What is highest and Best Use of land?

Highest and Best Use is the reasonable, probable, and legal use of vacant land or an improved property. Here’s a breakdown of the four criteria that Highest and Best Use must meet. 1. Physically possible You must consider the size, shape, topography, and accessibility of the site when determining if it is physically possible.

What is the first test of highest and best use?

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.

What is highest and best use in real estate?

Highest and Best Use is the reasonable, probable, and legal use of vacant land or an improved property. Here’s a breakdown of the four criteria that Highest and Best Use must meet.

What does highest and best use mean?

Highest and best use requires that the appraisal considers not just the current use of the property but also the potential value associated with alternative uses. 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.

How do you determine the highest and best use of property?

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?

Highest and best use analysis evaluates each potential use of the property and its corresponding value. The vacant property is valued at $150,000. Continuing to use the property for retail space yields an estimated value of $1,402,222. Converting the property into office space results in a value of $1,485,848.

What is a highest and best use study?

Definition: According to The Uniform Standards of Professional Appraisal Practice, 2002, highest and best use is defined as “The reasonably probable and legal use of property that is physically possible, appropriately supported, and financially feasible, and that results in the highest value”.

Which is the final step in determining the 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.

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.

When must an appraiser develop highest and best use?

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, ...

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 it mean highest and best offer?

Why do Realtors say “highest and best?” “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.

Which highest and best use criterion would require an appraiser to consider the need for the land use or how many similarly used land areas are in the market area?

Commercial use is the highest and best use.

What is the first step in highest and best use analysis?

However, modifying the existing use by conversion to an alternative use, renovation of the improvements, or alteration of the property may be necessary. The first step in identifying the highest and best use is examining what can be physically done with the property with the existing infrastructure currently in place.

How do you understand the highest and best use of land in construction sector?

The highest and best use is the reasonably probable and legal use of the land which is also physically possible, financially feasible and will result in the highest market value.

When analyzing highest and best use of a property Uspap requires an appraiser to?

USPAP Standards Rule 1-6 requires the appraiser to: (a) reconcile the quality and quantity of data available and analyzed within the approaches used; and (b) reconcile the applicability of the approaches, methods and techniques used to arrive at the value conclusion(s).

How would the market determine the 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.

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 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.

What is the highest and best use of land?

Earlier this year, we asked our real estate appraisal community, “What’s the ONE thing that is most often overlooked by appraisers?” The top answer we received was “Highest and Best Use.” Highest and Best Use is the reasonable, probable, and legal use of vacant land or an improved property. Here’s a breakdown of the four criteria that Highest and Best Use must meet.

What are the factors that determine if a site is physically possible?

You must consider the size, shape, topography, and accessibility of the site when determining if it is physically possible.

What is the first test of highest and best use?

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, ...

What is the highest and best use?

The concept of highest and best use is one of the fundamental principles that underlie real estate appraisal. Highest and best use requires that the appraisal considers not just the current use of the property but also the potential value associated with alternative uses. The Appraisal Institute has four tests that appraisers can use in order ...

How many tests can an appraiser use?

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 Highest And Best Use?

Wondering how to properly value a piece of property when there are so many confusing terms and methods available? Never fear, all you need to know is four simple tests.

The Four Tests

Possibility of Use: Think, can I build what I want on the land that I have? Here, we must determine if it is physically possible to use the property as intended. For example, if a developer plans on building a cement constructed parking garage on soft, sandy soil, the use may simply not be physically possible.

Methods of Property Valuation

There are four generally accepted methods to determine the value of commercial real estate. These methods are:

Example

Let's say we have a 20 acre vacant parcel of land priced at $500,000. It is zoned multi-family residential, and there have been several sales of 8-10 unit apartment buildings averaging $3,000,000. There have also been several sales of light industrial buildings located in an industrial park 1/4 mile away in the $1,000,000 range.

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.

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 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 the first two steps interchangeable?

Steps Three and Four (financially feasible/most profitable) cannot be determined until the first two steps are analyzed. Legally Permissible.

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?

The Appraisal Institute defines highest and best use as follows: 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. The four criteria the highest and best use must meet are: legal permissibility.

Who developed the concept of highest and best use?

The concept of highest and best use was popularized by economists Irving Fisher.

Is there a significant demand for a use in the market area of the subject site?

On the other hand, there may be a significant demand for a use in the market area of the subject site, and the site may be suited for this use, but a number of other sites may be equally or more appropriate. You must ensure that the existing and potential competition from other sites has been fully recognized.