Most appraisal textbooks define "Highest and Best Use" as the most profitable, legally permitted, economically feasible, and physically possible use of a piece of real estate. In some cases, this analysis can be one of the most important factors in the determination of value for the subject real estate.
Appraisers should always remember, one factor in a highest and best use analysis may include a consideration of the subject real estate “as if vacant”, and to compare this value to the value of the subject real estate “as improved”. If the value of the subject real estate is higher “as if vacant” than the “as improved” value, perhaps the subject real estate may be put to another use.
Dwellworks highly recommends appraisers stop work on an assignment and notify their client's appraisal QC department if they determine the highest and best use is something other than its current use.
USPAP (Uniform Standards of Professional Appraisal Practice 2016 – 2017) has requirements the appraiser is to follow. Standard 1-3 (b) requires the appraiser to develop an opinion of the highest and best use of the real estate. Appraisers must analyze the relevant legal, physical, and economic factors needed to support our conclusions for highest and best use.
To let clients and users of the appraisal report know that it complies with this USPAP requirement, the appraiser must summarize their highest and best use analysis within the report – Standards Rule 2-2 (a)(x). This inclusion lets any reader of the report know the appraiser’s reasoning behind their conclusion of highest and best use for that real estate.
Questions to consider during the highest and best use analysis include: What surrounds the subject property? Are nearby properties identical to your property? Is the site accessible? Are the surrounding sites easily accessible? How does the size of the subject lot compare to the sizes of the surrounding lots? Regardless of the property’s projected use, these are critical questions to consider when appraising a new structure or lot. Giving them proper thought will provide accurate insight into the most profitable use of the subject real estate.
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. It is important to note that this analysis does not provide clear insight into the subject property’s potential selling price. Avoiding this assumption will save an appraiser grief in the future.