In the real estate industry, appraisals are crucial for selling your home or property. If the buyer is unsure about how much your house is worth or you’re looking for a new residence to purchase, it can be helpful to have some professional opinions before offering it for sale. When considering an appraisal, some considerations should be made and understood.
One of the main things to consider is what the property is worth. The highest and best use for a property will be based on how it can generate income, most commonly by way of commercial space or residential homes. As a general rule, if a property has no income-generating potential, then it is not in the top-notch and best use.
An appraiser will evaluate and consider several factors before determining their top and best use, including size, market value, zoning laws, and the potential income generated from those spaces. The highest and best service will also consider the types of businesses already in that area and their financial projections for future growth.
So What Is Highest And Best Use?
Given certain economic conditions, the highest and best use is the property’s most profitable or beneficial use. This does not necessarily mean the owner’s best use is the best. In cases where the property is being appraised due to a legal dispute over ownership, the top-notch use could be used to determine fair market value. The critical factor in this process is the owner’s intent. Real estate appraisals determine the best use by comparing values between two different uses, i.e., retail and residential uses, commercial and industrial uses, etc.
Criteria For Highest And Best Use
The four criteria for what is the highest and best use to appraisals are legally permissible, physically possible, financially feasible, and maximum productivity. We will discuss the four criteria in detail and how they relate to home appraisals.
1. Legally Permissible
Legally permissible means that the best use is allowed under local zoning and other laws. The appraisal will be based on what the property can be used for, not what it was initially intended for. This can take place in many different ways. For example, properties must be changed and rehabbed before the property can be resold in some cities, or the original use of a property may not be permissible anymore because of zoning laws or other regulations.
For the most part, residential appraisers focus their examination on numerous zoning elements, such as minimum lot size and maximum construction size. A maintenance easement may exist on a waterfront property that impacts the existing or future building. If a single-family home is located on a small lot, the owners may want to build a larger home on the property.
However, suppose their property is zoned for single-family homes, and they have not obtained approval to build anything other than what is permitted by their zoning code. In that case, they cannot make these changes without changing their zoning.
In addition, some states or counties may require an owner to obtain particular variances if they wish to change/her use of the land. This is typically not an issue when appraising residential property and primarily affects commercial properties.
2. Physically Possible
Physically possible refers to a property’s features and potential to be developed. The property’s physical location can also be a significant factor in determining the highest and best use.
It could be challenging to develop if the property is located on a river. If the owner wants to build an industrial plant, but their property is located in a flood zone, it would be physically impossible and would not likely increase the land’s value.
An examination of “Physically possible” might also look at present advancements in engineering. For example, if a building is condemned and torn down, the best use of the land may be to build parking. However, due to concrete and steel technology innovations, this property might be more valuable using the same space to build an apartment complex or condominiums.
3. Financially Feasible
The third criteria of the highest and best use is whether it’s financially feasible, or whether a property could generate income. In many cases, the owner must look at numerous factors to determine if the property will be developed for the best use. These include market demand, zoning limitations, and projected development costs.
Residential appraisers can assess a property’s best use by looking at what is happening in the neighborhood. Suppose several homes on the market are not selling quickly compared to homes in different areas in town. In that case, this may indicate that their community is experiencing an oversupply of residential properties or a lack of demand for property in general.
The local economy may also affect the best use of the property. Suppose a homeowner is experiencing a trend in lower sales or a lack of activity in their community. In that case, it could indicate that there is not enough demand for residential or commercial development.
4. Maximum Productivity
Maximum productivity refers to the ability of a property to produce income or goods. A property’s highest and best use could be changed if it is already determined to have more significant profit potential in its current use than in any other alternative use.
For example, an owner of a warehouse may not make enough money from the initial sale of their property to justify selling it for another use but would be able to continue using the warehouse for storage purposes.
The highest and best use may be determined by evaluating what an owner could make from selling their property for industrial uses, then comparing this with other benefits such as trading the land for services such as advertising or employee training. The appraiser would determine which alternative use would be more profitable based on this information.
When evaluating the best use, the sale price someone would be willing to pay for a property should also be considered. For example, if someone’s home is in foreclosure and needs to sell it quickly, their highest and best use may not bring in as much money as it would if sold for residential purposes.
Learn More About Highest And Best Use In Appraisals
Appraisals can be an effective tool for the homeowner in finding out if a home would be more valuable if the best use could be changed. Appraisers can help determine the best use of a property, but it is ultimately up to the owner to make this determination. Rather than wait for someone else, using a professional appraisal service can get you moving on making decisions on your property in your best interests. If you’re considering whether or not you should seek professional advice from a real estate appraiser before selling your own home or buying another one, don’t hesitate to contact us for a free quote or call us at 1-801-882-2292.