How much is my property worth?
That’s the go-to question for most property owners, but the real question should be: What’s Highest and Best Use (HBU) of my property?
Highest and Best Use has been around as an economic concept and appraisal tool since the 19th Century. Used correctly appraising your property for its HBU can show you how to maximize the value of your property.
What is Highest and Best Use?
HBU is defined by the Appraisal Institute as the reasonably probable use of the property that results in the highest value. To figure out that probable use, they use four criteria:
- Legal Permissibility
- Physical Possibility
- Financial Feasibility and
- Maximum productivity.
We’ll go into more detail later, but basically, the criteria are tests that when used correctly allow a property owner to have comfort in knowing that they are getting the most they can out of their property.
Common Mistakes and Misconceptions About Evaluating Your Property
It seems so simple doesn’t it?
Of course everyone wants to use their property in a way to get its HBU. But there are tons of ways that you can go wrong in appraising your property for its HBU.
- Forming an Opinion about Highest and Best Use before Knowing the Value of all Potential Uses
A common mistake that property owners in appraising a property for HBU is failing to account for all the potential uses of a property. For example, most residential buyers immediately think of flipping a piece of land, but is that really the way to get the most out of your investment?
It’s easy to look at a house or building and appraise its value, but looking beyond the uses that are already in place is important to ensure you are finding the highest and best use.
It can seem like a daunting task to consider every potential use of a property. But doing things like a marketability analysis of the market area can narrow down the most profitable, competitive uses for a property to a sub-market area.
If you can understand the market behavior within that sub-market area, you are on your way to determining a property’s HBU.
- Existing Building Improvements are the Highest and Best Use
Another common misconception is that existing building improvements are the HBU of a property. After all, if what is there is good, then improving it must be better right?
But, in a lot of situations existing building improvements aren’t the most profitable use of a property once you factor in building age, condition, size, etc. For instance consider these two common situations:
- Say your land has a value of $1 million. If after building improvements, the building can’t be rented at a rate that provides a reasonable return on that $1 million dollar investment, then building improvements don’t make sense as the best use of the land. In that case, the highest and best use would be to demolish the existing building to make way for something that would make a return on the investment.
- If the increase in value of a building (the difference in valuation before and after renovation) does not equal or exceed the cost of the renovation, then renovating the property is not financially feasible and is not the property’s highest and best use.
But what if there’s a better way to utilize the land and property than flipping it for profit or just renting it out?
Appraising Your Property Using Highest And Best Use Criteria
As we explained above, there are traditionally 4 criteria in determining the highest and best use of a property: legal permissibility, physical possibility, financial feasibility, and maximum productivity.
If any of these four criteria are not met, then that potential use of the property can’t be considered its highest and best use.
Here are four examples of these highest and best use criteria in action:
- Legal Permissibility
Say your property is only zoned for use as a single-family residential site, then use of that property as a commercial development would not be legally permissible. So a commercial use such as a restaurant or an office building can’t be considered as the highest and best use of your property.
- Physical Possibility
Not only must your property be legal, it must be physically possible. If your proposed building requires a greater number of parking spaces than physically possible, then your proposed building can’t be considered as the highest and best use of the property.
- Financial Feasibility
Any improvements or changes to the property should always result in greater value to the land, than the cost to make the improvements or changes. There’s no point in renovating a building, if the cost to renovate is greater than the value of the building after renovations. If a project doesn’t make financial sense, then it isn’t the highest and best use.
- Maximum Productivity
Many times there will be more than one use for your property that is legally permissible, physically possible, and financially feasible. What to do then? Then you go with the use that produces the greatest return on the investment. The highest and best use is the one that would be maximally productive.
Why You Should Hire a Full-Service Expert Review Your Property for the best ROI
While you could always hire individual appraisers and experts to review your property for HBU, going with a single firm with access to in-house professionals such as an architect, general contractor or management specialist allows for better results.
One way to go about it would be to schedule various experts independently to perform all the different appraisals necessary to try to determine the HBU of your property. But that is time consuming and no guarantee that it will be done right.
Working with an investment/valuation expert such as Redmont Group, which has access to in-house professionals such as architects, general contractors and management specialists, allows access to better information which makes for more precise valuations.
Working with a single point of contact to appraise your property for its Highest and Best Use, not only saves you time, it saves you money.
If you think your property would benefit from a HBU assessment, please call the Redmont Group at 808.445.9436 today!
Stephen Hasha, MAI has over 30 years of experience as a licensed commercial real estate appraiser. Stephen is an MAI designated appraiser, giving him in-depth knowledge to provide a wide range of services relating to all types of property.