I recently had the opportunity to speak with Tim Andersen, whom I would call an expert in the topic of highest and best use. While this post is a good summary of that conversation, I would strongly encourage you to check out the podcast linked below where you can listen to the whole thing and get more detailed information on this somewhat confusing subject. It would also be wise to look into taking a class on this topic to brush up a bit on this important step in the appraisal process.
In general, appraisers may not take highest and best use seriously enough, especially if you consider that it is at the essential heart of an appraisal. When it comes down to it, Property B is not comparable to subject Property A unless Property B’s highest and best use is similar to that of Property A.
It is the appraiser’s job, before almost any other step, to determine a property’s highest and best use. There are two sets of analytics that you must go through in order to determine this. One: as if the site were vacant and available to put to its highest and best use, and two: as improved.
According to USPAP, it is the appraiser’s responsibility to analyze the physical, economic, and legal characteristics of the subject property in order to form the highest and best use. There is no place on the appraisal forms to do this, so you will likely need to do it in an addendum. In an effort to better help you understand what you are analyzing, I will briefly explain each of these factors. Economic characteristics might include what the property would rent for if it were being rented out and the business economy in the home’s area. Physical characteristics deal with what is even structurally possible. It also might take into consideration the functional obsolescence factor. Finally, legal characteristics include things such as water rights and zoning restrictions. In short, it is the appraiser’s job to analyze all of these factors while considering highest and best use.
Finally, after other tests of highest and best use are analyzed, it is the appraiser’s responsibility to look at the most difficult step; what use will bring the highest value. This is where the real process of valuation comes to play. Most of the time, highest and best use will be obvious to you, but you must be able to support what you are seeing. This is where many appraisers fall short. Because it is obvious, we forget to describe our process and produce a workfile to support it.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 294 Highest and Best Use