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Highest & Best Use

Highest and Best Use is a valuation concept which means a property's value must be based on the best economic purpose to which it can be used.

Consider the following:

Built on a 905 square metre site is a single storey detached house in reasonable condition which is currently used as a residence but includes some office and storage use.

Zoning regulations allow for the continuing use as a residential property, use as an office or storage area or the development of a light industrial use. These are the only uses considered to be possible and probable.

The value of the property is then estimated assuming different allowable uses. The results are as follows:

Use No. 1: Value as House
 Value Estimate

 $510,000

 based on Direct Comparison
 Net Operating Income (NOI)

  $23,400

 Net Income Multiplier (NIM)

22

 or 4.55% rental yield
 Value Estimate

 $514,800

 based on Rental Income
Use No. 2: Value as Office/Storage Space
 Net Operating Income

 $50,000

 Net Income Multiplier

13

 or 7.69% rental yield
 Value Estimate 

 $650,000

Use No. 3: Value as Vacant Industrial Site
 Site Area

798

 Value per sq metre

$600

 Value Estimate

 $478,800

 based on $/sq m comparison


In this example the Highest and Best Use of the property is as Office/Storage Space ($650,00 versus $514,800 as House and $478,000 as Vacant Industrial Site).

However, it is more difficult than it seems. Several questions have to be answered to estimate the value of the property for each use. These questions include:

(a)

In Use No. 1 which adopts the Direct Comparison approach of valuation, which houses were selected as sales comparables?

(b)

What outgoings were recoverable and what were not recoverable in determining the Net Operating Income?

(c) How was the Net Income Multiplier (or rental yield) derived?
(d) How was the value per sq metre of site area known?


Also, the zoning regulations have to be studied to establish what uses are permitted on this site....etc....etc.



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