Valuation Process and Highest and Best Use
What the exam tests
This domain ties the process together: the steps in order, the definition of the problem, and the four tests of highest and best use.
The valuation process
- Identify the problem: client and intended users, intended use, type and definition of value, effective date, relevant property characteristics, assignment conditions, scope of work.
- Determine scope of work, problem-specific.
- Collect data and describe the property.
- Analyze the market.
- Conclude highest and best use.
- Estimate land value.
- Apply the approaches: sales comparison, cost, income.
- Reconcile and state the final opinion.
- Report.
Highest and best use
The reasonably probable, legally permissible, physically possible, appropriately supported, financially feasible use that produces the highest value. Order matters: legally permissible, then physically possible, then financially feasible, then maximally productive. Analyze the site as vacant and as improved. If the existing use is not the highest and best use as improved, that drives the cost approach treatment and the depreciation conclusion.
Worked example
A 60 × 100 corner lot is zoned for four units and has adequate utilities. A fourplex would cost $900,000 to build and be worth $1,050,000 - feasible. A sixplex is physically possible but not legally permissible, so it is eliminated. If the existing duplex is worth $450,000 and the vacant site $300,000, the existing use contributes and is the highest and best use as improved.
Traps
Running the four tests out of order. Calling a use highest and best because it is merely permitted. Skipping the as-vacant analysis. Confusing the client with the intended user.