The Highest And Best Use Principle: What It Is And How It Relates To Real Estate

American property law is where the highest and best use principle has its roots. Principles of real estate appraisal are also an area to which it relates. It can be directly related to the value of your property, as well.

A use that is logically probable that results in the highest value of your property is the main feature behind the highest and best use principle, also referred to as HBU. Mainly, HBU is a simple designation that identifies a property and explains how it has the potential to have a higher value, if it was used for a different purpose. For real estate appraisals specifically, a piece of property is assessed at its highest or best use in order to maximize its total worth and also to increase the money gained from it.

Each possible use must go through a set of tests in order to determine a property's highest and best use. Sometimes varying, if you want to guarantee your house meets its highest and best use, you must put it through tests to determine if it is legally allowable, physically possible, financially feasible and maximally productive.

Firstly, only uses that are or may possibly be allowed by law are eligible to be highest and best uses. If it is not allowed by government regulations, zoning, restrictions in deeds and covenants, it is not a legally allowable use.

Second, the property's size, shape and terrain indicate its ability for the second factor frequently tested. If it would necessitate a bigger plot of land, for instance, the highest and best use is not physically possible and does not meet this criteria. Similarly, if a highest and best use necessitates a flat piece of land and the land in question is rocky, its highest and best use would not be physically possible, thus failing this test.

Financial feasibility is also necessary for a property's highest and best use as a third criteria. Ample revenue must be made to rationalize things like construction costs and profit for the builder in an effort for any proposed highest and best use of a property to be financially possible. There would be no way for it to meet the financial viability test if a proposed highest and best use would end up costing more on the property's upgrades than it could hope to generate in revenue.

In order for the last highest and best use test to be met, a highest potential gain for the builder must be obtained. Regardless what could be actually built on the property, a property's highest and best use may still be designated. It has to meet all four of these specific criteria for a highest and best use of a property to be guaranteed.