What Is Highest and Best Use in Real Estate?

Every highest and best use question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. To qualify as the highest and best use of a site, a use must be legally permissible, physically possible, financially feasible, and:

   • AIdentical to the use currently made of the property
   • BThe least expensive alternative available to develop
   • CApproved in advance by the county assessor
   • DMaximally productive of value among the feasible alternativescorrect

   Why: The fourth test asks which surviving use is "Maximally productive of value among the feasible alternatives". The current use is only sometimes the highest and best use, so treating it as automatically qualifying skips the analysis entirely.

   Valuation

2. 2. A Wisconsin parcel could physically support a profitable hotel, but current zoning prohibits that use and no change is reasonably probable. May the appraiser select the hotel as the highest and best use because its projected return is greatest?

   • AYes, a physically possible use qualifies if its gross revenue exceeds the existing use's revenue
   • BNo, the use must be legally permissible as well as physically possible, financially feasible and maximally productivecorrect
   • CYes, the use with the greatest projected return qualifies even when legally prohibited
   • DNo, an appraiser must keep the existing use and may not consider alternatives

   Why: The Wisconsin Property Assessment Manual requires all four highest-and-best-use criteria: legal permissibility, physical possibility, financial feasibility and maximum productivity. A prohibited hotel fails the legal test, but the rule does not freeze the existing use.

   Valuation

   Key term: zoning

3. 3. An appraiser must value a property at its:

   • AHighest and best usecorrect
   • BAssessed value for tax purposes
   • CReplacement cost
   • DCurrent use, regardless of alternatives

   Why: Highest and best use is the use that is legally permissible, physically possible, financially feasible and maximally productive. All four tests must be met.

   Valuation

4. 4. In a condemnation action, just compensation to the owner is normally measured by:

   • AThe value the condemning agency gains from the project
   • BThe assessed value shown on the tax roll
   • CThe price the owner originally paid plus improvements
   • DThe fair market value of the property takencorrect

   Why: Just compensation equals the fair market value of what is taken, judged by the highest and best use of the property. What the owner originally paid is irrelevant, as is the benefit the agency expects to receive.

   Land use controls

   Key terms: eminent domain, market value

5. 5. A vacant site could physically support apartments, but current zoning prohibits them. Which highest-and-best-use test is not yet met?

   • AMaximum productivity regardless of legal use
   • BLegal permissibilitycorrect
   • CPhysical possibility necessarily
   • DFinancial feasibility conclusively

   Why: A proposed use must satisfy legal constraints as well as physical and financial tests. Physical feasibility alone does not establish highest and best use.

   Valuation

   Key term: zoning

6. 6. Two uses are legal, physically possible and financially feasible. Which further highest-and-best-use criterion helps choose between them?

   • AHighest projected gross revenue regardless of expenses
   • BThe owner's preferred use regardless of productivity
   • CMaximum productivitycorrect
   • DLowest initial construction cost regardless of returns

   Why: Highest and best use includes selecting the maximally productive qualifying use. Personal preference alone is not the appraisal criterion.

   Valuation