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Highest & Best Use
May 20th, 2024 12:14 PM
Most of the time, the highest and best use of a property is self evident.  Every now and then however, particularly with 2-4 unit properties, the highest and best use can be a tricky question to figure out.  Add in zoning changes allowing for higher density properties, and the question can get even more thorny.  Every appraisal requires that the appraiser consider the highest and best use of the property, and there are four criteria for determining highest and best use: 

-What is physically possible.
-What is legally permissible.
-What is financially feasible.
-What is maximally productive.  

With a single family home in good repair on a typical residential lot in a subdivision, it's a no brainer, but what if the property is a grandfathered in (legal -nonconforming) triplex on a site where the zoning only allows for single family homes?  What is legally permissible in that case?  What is maximally productive?  Good question! 

If you own a property where there is a highest and best use question, or if you are involved with such a property as a real estate professional, knowledge of Fannie Mae's Selling Guide commentary concerning this issue can be very helpful. 

Please note the following concerning Highest And Best Use analysis per the Fannie Mae Selling Guide B4-1.3-04, Site Section of the Appraisal Report:  

The appraiser determines highest and best use of a site as the reasonable and probable use that supports the highest present value on the effective date of the appraisal. For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate. All of those criteria must be met if the improvements are to be considered as the highest and best use of a site.

It goes on to say: 

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.

So in most cases, if the value of the property as improved is greater than the value of the property vacant then, per Fannie Mae, the highest and best use is the current use.  

The caveat to this that may be an unknown and something to consider, is whether the municipality will allow the property to be rebuilt if more than 50% destroyed.  You'll have to contact them to figure that out!   

Contact Comp One Appraisal Services today and put our local expertise to work for you.  Based in the Globe Building at Peachtree Dekalb Airport, we are the perfect resource for attorneys, agents, homeowners, and lenders.  Thanks for reading!  

Got an appraisal issue or question?  Call my Appraiser On-Call For You Hotline at 404-245-7577. 

Posted by Cameron Horne on May 20th, 2024 12:14 PMPost a Comment

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