Residential Market Analysis and Highest and Best Use
What the exam tests
Residential market analysis questions ask you to delineate a market area, read demand and supply, and test highest and best use. The exam favors application to neighborhoods and sites, not memorized definitions.
Core rules
- Market analysis identifies the market area, demand sources, competitive supply, absorption, and market conditions. Neighborhood life cycle stages are growth, stability, decline, and revitalization.
- Highest and best use is the reasonably probable and legal use that is physically possible, appropriately supported, financially feasible, and that results in the highest value.
- Test HBU as vacant and as improved. As improved, the use must consider demolition and redevelopment.
- The four tests are legally permissible, physically possible, financially feasible, and maximally productive.
Worked example
A 9,000-square-foot lot is zoned R-2, which permits a duplex. It has an older single-family house. As vacant, a duplex is legally permissible and physically possible if setbacks and parking fit. Financially, duplex rent supports land value of $180,000 after construction. As improved, the house is worth $260,000; land as vacant is $150,000; demolition is $15,000. The existing house contributes more than the vacant land alternative, so HBU as improved is continued single-family use. The appraiser must still disclose the duplex potential and reconcile it.
Traps
Testing only as vacant; ignoring deed restrictions or zoning overlays; treating an interim use as the final HBU; using absorption without a defined market area; assuming highest price equals highest and best use.