![]() ![]() Of all the financially feasible uses, the one that produces the highest residual land value (yields the highest net return to the investor) is the highest and best use. The highest and best use must be the most productive use. All uses that produce a positive return are regarded as financially feasible. This can include costs to maintain or improve the remaining economic life. There must be a demand for the use in the market that will generate and sustain sufficient income to cover the costs of construction, to have enough money for maintenance during the economic life of the property, and to provide both a return of and a return on the investment. The highest and best use must not be too speculative. For example, a use that requires a larger site than the subject property, or needs utilities that are not available to the subject property, should be eliminated from consideration. The proposed or existing use must fit the size, shape, topography, and other specific characteristics associated with the parcel or location. The highest and best use depends on physical factors. * "Unrestricted" ownership of property is actually subject to the necessary powers and rights of government – local real estate taxation, the power of eminent domain (condemnation, at a fair price), police power (such as building codes, health requirements, traffic regulation, and zoning), title by escheat, and control of air space (at a reasonable height). These improvements are recognized as legally (grandfathered) nonconforming uses. * However, an improved parcel with land uses that are not permitted under current regulations may have been constructed prior to current regulations. ![]() The property tax appraiser must consider the effect that any enforceable government restrictions, such as zoning regulations, have on the value of property. ![]() The highest and best use must be a use that is allowed by government. The highest and best use of a property is the reasonable and probable use that will support the highest present value as of the effective date of the appraisal. This entails identifying the most appropriate market and the most profitable use within that market. The concept of highest and best use requires that each property be appraised as though it were being put to its most profitable use (highest possible present net worth), given probable legal, physical, and financial constraints. Principle of Increasing and Decreasing Returns.Although these principles are individually listed, many of the principles are interrelated or affect the other in determining real property value. These underlying appraisal principles are important in understanding the foundation of the income approach to value and the actions of typical buyers and sellers in the real property market. Therefore, we begin this lesson by first reviewing some of the basic concepts of real estate economics that affect how typically informed buyers and sellers respond in an open market, and then reviewing some concepts and principles applicable to the income approach.īased on observation and analysis of real estate markets, appraisers have developed principles to describe how real estate markets operate. Appraisers emulate what informed buyers and sellers will do in an open market. The value of real property can be influenced by many factors, such as location and type of use however, when appraisers make/render an opinion of market value, they must also take into consideration how typical buyers and sellers are responding in the market. Lesson 2 – Basic Economic Principles of Real Property Value (The Income Approach to Value) Appraisal Training: Self-Paced Online Learning Session ![]()
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