What is Highest and Best Use?

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highest and best valueAnytime you are looking at selling or buying a property you need to find out what the Highest and Best Use is of that particular property. What this means is that what type of use of the property is going to deliver the highest value. Now there are some criteria that needs to be fulfilled from an appraiser’s standpoint and these criteria should also be followed if you are an investor. Ask yourself the following questions and you will get to your answer.

The Highest and Best Use of a property may or may not be the current use of the property so keep that in mind. As appraisers we ask the following four questions to establish the Highest and Best Use. The first one (in no particular order), is it it legally permissible? In other words if the highest and best use for income points to the property having a guest studio, would that studio be legally permissible. This is especially important if the property is being looked at as an income property.

The second question is, ‘Is it legally possible?’. Sure the highest and best use of a property might be to add on a guest studio and you may find that it is legal to do so but if the property doesn’t have enough lot size to do it then it would eliminate the guest studio option as the highest and best use of that property. You want to use the questions to find the type of use that will produce the highest value and that often means you need to go through a process of elimination. The four questions are designed to do that.

The third question is, ‘Is it financially feasible’? What does it cost, is financing available, and will the cost to acquire the guest studio be worth the increase in value? If you end up spending $300,000 but you only increase your value by $10,000, it’s probably not worth it unless somehow it works out that you could recapture your initial cost in a reasonable time period through the rental income.

Finally, the last question is, ‘Is it maximally productive?’. Will the property produce the highest net return once it is converted to its highest and best use. Properties don’t always have to be converted into the highest and best use. In fact most properties are already at their highest and best use. But you should always ask the question if the property is returning the highest value back. This is a step that can often be overlooked because many properties will produce good recurring value back. Most people don’t ever realize that they might be leaving a lot of money on the table.

This is one of the reasons that you should consult an appraiser especially one who is good at doing cash flow analysis on income properties as well as one who is competent enough to do¬†unit in place appraisals for new construction properties. The unit in place method breaks down the cost of each component of the property as well as the cost of installation/building of that particular component. It’s a very detailed cost approach method and can be the difference in determining whether a developer will feel comfortable with going forth with a project. The ROI can be very difficult to project on a property that has not been built yet.

So the next time you are looking at valuing a property and you want to get the most bang for your buck, make sure you run through the 4 steps so you can identify the highest and best use of that property. Always make sure to consult with a knowledgeable appraiser who is willing to do the due diligence necessary to uncover any hidden uses which might yield the best value for you.

Good luck and we hope that helps with your next investment.

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Fast Home Valuation from Certified Appraisers

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Need to know what your house is going to appraise for?

Appraised Property

It’s time to get a home valuation from an actual appraiser. It’s crucial information when you are looking to sell your house. Of course you want to consult with a local real estate agent or realtor as well but to get an accurate idea of what your current property value is you should always consult an appraiser at the very least. The best course of action would be to have an actual appraisal done.

Although you are the one selling your house it can really help to market your property by including a copy of the appraisal with your MLS listing and other marketing materials that go with your property. New buyers are often concerned about overpaying for a property especially if your price might be on the high end. Put their mind at ease by showing them an actual appraisal.

Also keep in mind that just because your property will only appraise for a certain amount, that doesn’t mean you have to list or sell your property for that amount. In fact, you can list your property for any amount that you want. Now of course it doesn’t mean people will pay what you are asking for it, but then again it doesn’t mean they won’t. All an appraisal does is really show you how much the bank is willing to lend on the property. So if a prospective buyer wants to buy your house but you are listed higher than what it will appraise for, then you will have to look for buyers who are willing to pay out of pocket over and above the appraised value. Letting the buyers know this up front can weed out the ones that either can’t do it or are unwilling to do it. There are many cases, especially in a seller’s market, where prospective buyers will not only buy your property when it is listed over the appraised value, but also will buy it over the listing price. In a competitive market buyers will often come in over asking price in a bid to secure the property.

This happens routinely in markets like Austin and Waco Texas. They are two of the hottest real estate markets and demand for housing is high. In fact at the time of this article, Waco is the hottest real estate market in the country. Austin is one of the fastest growing cities. Both markets are benefiting from new businesses being located there. This in turn benefits local Austin and local Waco businesses as well and drives population growth to those areas. Local home improvement companies like roofers, plumbers, painters, and tree removal services really benefit.

These areas are seeing an influx of people coming from historically higher priced markets where the job market isn’t as good and the cost of living is much higher like California. When people from other real estate markets sell their homes in these higher markets, they will usually have more money to put down on a new house in a lower priced market such as Waco or Austin. Of course these markets aren’t so low priced now but when compared to certain markets in Los Angeles, San Diego, or San Francisco they still lag behind. For example, some 1,200sf properties in La Canada (A city in Los Angeles), can sell for $650,000. Often the seller will make $200,000 on the sale and will have that money as a down payment. Now they can go and buy a 3,500sf house in Waco or Austin for $300,000 to $400,000 and only have a mortgage of $100,000 to $200,000 and have 3 times the house. This of course will eventually drive up local real estate prices just like they did in California but it will be awhile until the living costs catch up as well.

This type of population growth is also one of the reasons that you should get a real estate appraisal soon. Prices can go up very quickly and you might want to get an appraisal to dispute your property taxes. Usually you can use an appraisal for a tax dispute for up to one year. That means when your property taxes go up in accordance with all of the activity that is driving prices up, you can show that your property is lower based upon the appraisal you got earlier in the year. You can almost always expect your property taxes to rise when the surrounding housing market is booming. This can be really devastating to long term property owners who bought their homes 10 to 20 years ago for under $100,000 and now their property is worth $300,000. If that homeowner is retired and living on a fixed income it can be even more devastating. Getting an appraisal can even be done retroactively, to show the value as it was in the past. This can help to keep the current taxes for certain homeowners down by showing the county that the property was worth less than $100,000 at the time they bought it and then use the same appraisal to show that the condition of the house hasn’t improved a whole lot over the years. Many times property taxes are based on the sales of newer properties and these can be completely different from what the taxed property owner’s home is.

All in all there are many reasons you should get an appraisal. If you are in an active market and you are thinking of listing your house, doing renovations, or want to dispute your taxes then go ahead and call a local appraiser. You might want to get the opinion of a certified residential appraiser. It can’t hurt.

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