The Highest and Best Use Principle What It Is and How It Relates to Real Estate

3 June, 2017

The highest and best use principle originally derives from American property law. You will also see it come up often in the arena of real estate appraisal. You can see below how this principle is closely related to the value of your home, as well.

The highest and best use principle is also just called HBU and simply refers to a specific use that is reasonably likely, as well as one that produces the highest possible value for the property in question. What it ultimately does is help find properties that are potentially more valuable if they were used for a different purpose than what they’re currently being used for. This can be used particularly in real estate appraisals to assess a property at its highest possible value, which in turn maximizes its value and increases the money you as a homeowner can ultimately make from it.

If you want to figure out a property’s highest and best use, you’ll have to run it through a series of tests. Sometimes varying, if you want to ensure your house meets its highest and best use, you must put it through tests to determine whether it is legally allowable, physically possible, financially feasible and maximally productive.

The only uses that are eligible to be highest and best uses, first and foremost, are those that can be allowed by law. If it is expressly forbidden by governmental regulations, prohibited by zoning or not allowed by deed or covenant restrictions, it is not a legally allowable use.

You can determine the second factor of a property’s eligibility by the specific size, shape and topography of the property in question. It does not meet this test for highest and best use if the use would require something like a large piece of land, because then it would not be physically possible. If the highest and best use of a property requires a flat piece of land and the land in question is mountainous, as another example, it is not physically possible to meet this test for highest and best use.

Feasibility in a financial sense is also required for a property’s highest and best use as a third test. Enough revenue must be generated to justify things like construction costs and profit for the builder in order for any proposed highest and best use of a property to be financially feasible. The highest and best use would not be considered financially feasible if it would cost more to improve the property than the property could ever hope to earn in revenue.

The highest possible return must be created for the builder in order for the last highest and best use test to be met. The property might still only have one of those uses as its highest and best use, even if any type of residential or commercial property could feasibly be built on the property. It must meet all four of these tests for a highest and best use of a property to be unquestioned.

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