What does the term "highest and best use" refer to in real estate appraisal?

The term "highest and best use" refers specifically to the most profitable legal use of a property. In real estate appraisal, this concept is crucial because it helps appraisers determine the maximum value a property can achieve based on its potential use. Highest and best use considers not only the current use of a property but also its physical, legal, and financial constraints.

For a use to be considered the highest and best, it must be legally permissible, physically possible, financially feasible, and maximally productive. This definition ensures that the appraisal reflects a use that would yield the greatest return on investment. For instance, if a property is located in an area where commercial development is thriving, but it is currently being used as a single-family home, the highest and best use might be to convert it into commercial space to maximize its value.

Other options do not capture the essence of the term. The maximum rent a property can achieve focuses solely on income potential rather than overall use and value. The condition of a building at the time of sale pertains more to its physical state than its economic viability and legality. Average market conditions refer to general trends rather than the specific use that would yield the highest value for that particular property. All these factors are indeed important in appraisal