Let me qualify my statements regarding this issue, I am not a state regulator, a text book writer / editor or an appraisal educator. Having said that, it is my opinion as a commercial appraiser that saying that the highest and best use of a real property is for "speculation" is a bad idea, it is just asking for trouble. Most real properties, at least in urban areas of Nevada, are subject to a land use plan and many of those have been placed in some zoning category when a zoning ordinance was implemented. Even properties in rural areas that have no planning or zoning ordinance in place generally have some development potential for either a residential, industrial or commercial use depending on the availability of roadways, railroads, utilities and surrounding land uses.
So why do appraisers conclude that a "speculative" use is the highest and best use? It's my opinion that appraisers don't want to commit to saying a property will be used for a commercial use, for example, when an area is undeveloped and a land use plan / zoning ordinance has not been established that indicates what the government wants happen their. If they simply don't know what the use will be, then why commit and be wrong, and the use is labled as "speculative." I don't think that that conclusion, however, excuses an appraiser from the reasonable analysis of the potential use of the subject property. If a subject property in an area that has no zoning ordinance and no land use plan, a highway intersection property is still likely to have commercial use potential and an off-road back lot parcel still usually has a less intensive use potential. If it is well discussed an appraisers conclusion that one use versus another is simply sound reasoning.
Speculation in my opinion only describes buyer and seller motivations not use potential. If an appraiser develops a highest and best use via an analysis of a property he or she will usually come to some conclusion about a "reasonable" or "anticipated" use. An appraiser can get into trouble when he or she concludes a highest and best use as "speculative" and then procedes in their appraisal report to make choices about what kind of comparable sales that that they will be used for comparison. If there are other properties with a similar location and no established land use plan or zoning ordinance you probably are safe, but if you say that the highest and best use of a property is for "speculation" and then you use properties that are zoned commercial for comparison, you are effectively telling the reader of your report that you have really concluded that a commercial use is the highest and best use.
Its my opinion that "speculation" was used in the past to described the "maximally productive" use in a number of appraisals since appraisers often cannot discern what someone will do with a property that can be developed for a wide range of uses like those allowed under a general commercial zoning classification. There may be 10 uses that are financially feasible, do appraiser really think that they can calculate which one of those uses will provide the highest return? If you think that you can pick the development winners then maybe you are in the wrong business, they need you on the investment side and not on the analytic side, for the rest of us mere mortals the choice is "speculative."
So think about the comparable sales that you are going to select before you make a highest and best use determination, don't conclude that "speculation" is the highest and best use and then select residentially zoned properties as comps, that just doesn't make sense.
For more appraisal information contact Glenn Rigdon
MA, MRICS, ASA is a Las Vegas / Henderson Nevada appraiser who can be contacted via email or via his business website Appraiser Las Vegas
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