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Highest and Best Use Step-By-Step - Land Value

by Administrator on Sep 15, 2018 Highest and Best Use 20 Views

Many people make assumptions about vacant land parcels based on what they have been told on based on a brief observation.  Properties that look valuable may however have little or no potential use, and thus little or no monetary value, while properties that appear worthless can be extremely valuable.

For appraisers it all begins with a highest and best use analysis.   Depending on the use a highest and best use analysis can be based on observed evidence and the land use patterns, but the process can be more intensive when necessary and include a complete market analysis and feasibility study.  Most appraisals do not require the most intensive highest and best use development process.

Appraisers generally start down their analytic list, and ask, “What is physically possible?” A steep topography will get many builders shaking their heads, yet I have seen properties that many would have considered unbuildable developed with multi-million dollar homes. There can be significant costs dealing with rocky soils, steep slopes and poor access but it may be physically possible.

Some physically possible uses may be restricted by zoning, overlay districts or government ordinances. So in one area the jurisdictional (like a City) may restrict building on property with a 10% grade while another may not restrict development until the grade is 15% or more. The restriction is often reasonably imposed on the property owner for public safety. Restrictions, or the lack thereof, form a property’s legally permissible uses that can effectively demand that a property not be used for one or any purpose. Deed restrictions are another way to limit the use of a property by limiting its legally permissible use or uses.

Planning is another factor that can in some jurisdictions make a significant difference to a property’s potential use. Here in Nevada a property can be zoned R-E, Rural Estates Residential which allows a rural residential use up to 2 dwelling units per acre (2 DUPA) but have CT, Tourist Commercial planning that suggests a much more intense use of the property.  Observed land use patterns are generally reflected in planning.  Appraisers who decide that planning is not important may unhappily discover that buyers and sellers in the market are laser focused on planning since most understand that changing the zoning of a property to conform with its planned use is reasonably probable.

Once an appraiser has considered the physically possible uses and also identified its legally permissible ones the potential use or development choices have often been narrowed.

The determination of financial feasibility is the crux of a highest and best use analysis since it where the appraiser determines which of the physically possible and legally permissible uses will provide the greatest return. It is assumed that a land appraiser understands how much of an impact the physical limitations have on its value, how much of the property is usable, and how valuable it’s zoning and planning are. Property with a commercial use potential is often more valuable than property with only a residential use potential, but not always.

Appraisers often have to provide evidence of their highest and best use choice in this portion of the analysis.  It may be that there is more than one use that could potentially provide a similar return to the land.  Thus, determining the “maximally productive” use from among the uses with a similar return may be difficult.  To make the best maximally productive use determination an appraiser must consider the “highest relative value considering risk.”  A decision can be simplified by laying out the choices in a table format.

The highest and best use concluded via analysis considers the fact that a physically possible, legally permissible and financially feasible use of a property may be maximally productive.  There are however jurisdictions in which zoning and planning have created many more zoned sites than are needed.   Having a property that meets with most of the highest and best use criteria does not guarantee that market demand will exists to absorb it if other better suited properties compete with it.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, IFAS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or http://www.horizonvillageappraisal.com, or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

Article source: http://www.appraisalarticles.com/highest-and-best-use/4711-Highest-and-Best-Use-Step-By-Step-Land-Value.html

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