📈 What Is Highest and Best Use in Real Estate?

How Highest and Best Use Is Determined

Appraisers use four required tests to determine the highest and best use of a property. All four must be satisfied for the use to qualify. This analysis helps identify whether the current use of the property is optimal or whether redevelopment or alternative uses could create greater value.

The four tests for highest and best use:

• Legally permissible — The use must comply with zoning laws, building codes, deed restrictions, HOA rules, and environmental regulations.
• Physically possible — The site must be capable of supporting the use, considering size, shape, topography, utilities, access, and structural conditions.
• Financially feasible — The use must generate sufficient demand or income to justify development or continuation.
• Maximally productive — Among all feasible uses, this is the use that produces the highest value or greatest return.

Only the use that passes all four criteria is considered the property's official highest and best use. This evaluation is essential for accurate valuation, financing decisions, and development planning.

Why Highest and Best Use Matters

For Buyers & Investors:

• Identifies redevelopment or value-add opportunities
• Helps determine whether a property is underutilized
• Affects acquisition strategy and maximum offer price
• Guides zoning, construction, and design decisions

For Sellers:

• May increase market value beyond the existing use
• Attracts a wider audience, including developers and investors
• Supports pricing strategy and negotiation strength
• Helps explain land value vs improvement value

Examples of Highest and Best Use

Example 1: Redevelopment Opportunity
A small single-family home sits on a lot zoned for multi-family use. The land value exceeds the value of the existing structure. Highest and Best Use: Demolish the home and develop a duplex or apartment building.

Example 2: Commercial Conversion
A warehouse in a growing downtown area is now surrounded by retail and mixed-use development. Highest and Best Use: Convert the building into loft apartments or retail space.

Example 3: As-Improved Use
A well-maintained home in a stable residential neighborhood generates no higher return from alternative uses. Highest and Best Use: Continue current residential use.

Why Highest and Best Use Matters for FSBO Sellers

Understanding highest and best use helps FSBO sellers make informed decisions when pricing their home and evaluating offers—especially in markets experiencing redevelopment or zoning changes.

• Explains why investors may offer above—or below—asking price
• Highlights potential value beyond the existing home
• Improves negotiation leverage with developer buyers
• Helps justify price during appraisals or buyer inquiries

Listing your home through Flat Fee MLS exposes your property to residential buyers, builders, and investors—maximizing interest from all potential highest-and-best-use scenarios.

Related Real Estate Concepts

• Fair Market Value
• Appraisal
• Zoning
• Land Use

Frequently Asked Questions

Is the current use always the highest and best use?
No. Many properties are underutilized, especially in areas with changing zoning or redevelopment activity.

Does highest and best use apply to single-family homes?
Yes. Even residential homes may have higher land value for alternative uses such as multi-family development.

Can highest and best use violate zoning rules?
No—unless rezoning is reasonably likely. HBU must be legally permissible or likely to become permissible.

Do appraisers always analyze highest and best use?
Yes. It is a required step in all standard residential and commercial appraisals.

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