404.02: Highest and Best Use

The highest and best use of a site is the reasonable and probable use that supports the highest present value on the effective date of the appraisal.  For improvements to represent the highest and best use of a site, they must be legally permitted, financially feasible, and physically possible, and must provide more profit than any other use of the site would generate.  All of these criteria must be met if the improvements are to be considered as the highest and best use of a site.

A strict theoretical highest and best use analysis identifies the perfect improvements for a site -- assuming that the site is vacant and available to be developed.  The appraiser's highest and best use analysis of the subject property should consider the property as it is improved.  This treatment recognizes that the existing improvements should continue in use until it is financially feasible to remove the dwelling and build a new one, or to renovate the existing dwelling.  If the use of comparable sales demonstrates that the improvements are reasonably typical and compatible with market demand for the neighborhood, and the present improvements contribute to the value of the subject property so that its value is greater than the estimated vacant site value, the appraiser should consider the existing use as reasonable and report it as the highest and best use.

On the other hand, if the current improvements clearly do not represent the highest and best use of the site as an improved site, the appraiser must so indicate on the appraisal report.  In such cases, we will not purchase or securitize a mortgage that is secured by the subject property.