Questions and Answers
What is the definition of Highest and Best Use?
What influences the value of real estate?
How it is used
What does Highest and Best Use analysis influence?
The value of the property
What are the four characteristics of Highest and Best Use?
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What is meant by the term Legally Permitted Use?
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Define Physically Possible Use.
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What is Economically Feasible Use?
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What does Maximally Productive Use indicate?
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What is the Principle of Anticipation?
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What is Interim Use?
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What is Excess Land?
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What is Plottage?
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What is the Sales Comparison Method?
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What is the Land Residual Method?
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What is Ground Rent?
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What is the purpose of Depth Tables?
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Study Notes
Highest and Best Use
- Represents the most profitable and reasonable use of a property that maximizes its present value.
- Considers all potential uses perceived by the market.
Value Dependence
- Property value varies significantly based on its intended use; a site may be worth more for commercial than agricultural purposes.
- Real estate appraisal centers on determining the highest and best use for accurate market value.
Purpose of Analysis
- Analysis influences property value by connecting market value to the most profitable use.
- Guides separate valuation of land and improvements; consistent use requires both components to align with the highest and best use.
Comparable Properties
- Identifies properties with similar highest and best use for effective sales comparison in valuation.
Characteristics of Highest and Best Use
- Legally Permitted Use: Must comply with zoning and legal restrictions.
- Physically Possible Use: Site's physical traits—size, shape, and soil—must support the intended use.
- Economically Feasible Use: Must provide a positive return; oversupply conditions may render development financially impractical.
- Maximally Productive Use: Focuses on use yielding maximum value through productivity.
Principle of Anticipation
- Future benefits and potential uses are crucial in determining property value; the likelihood of changes affecting use must be considered.
Interim Use
- Temporary highest and best use designated for properties awaiting development.
Distinction of Land Types
- Differentiates between highest and best use of vacant land and improved properties for valuation.
Improvements Impacting Value
- Existing structures may alter highest and best use; appraisers consider costs of removing improvements when assessing value for future uses.
Legally Nonconforming Uses
- Permits continued usage of properties that no longer meet current zoning laws but were compliant prior to changes.
Excess Land and Plottage
- Excess Land: Portion of land not needed for highest and best use.
- Plottage: Value increase resulting from combining multiple lots for more profitable use.
Sales Comparison Method
- Dominant and reliable approach, emphasizing analysis of actual sales data to establish property value.
- Elements of Comparison include location, timing, financing terms, property rights, and physical characteristics.
Property Rights and Adjustments
- Ownership rights and associated restrictions significantly impact property value; adjustments must account for differences in rights and restrictions among comparables.
Land Valuation Methods
- Six Methods: Include Sales Comparison, Allocation, Extraction, Development, Land Residual, and Ground Rent Capitalization techniques.
Allocation Method
- Estimates land value based on a predetermined ratio of land to improvements derived from similar properties.
Development Method
- Used for large undeveloped parcels, applies discounted cash flow techniques to project future net cash flows from land sales.
Land Residual Method
- Employs income capitalization to value land based on income produced, necessitating accurate determination of various income-related factors.
Ground Rent Capitalization
- Values land through the capitalization of ground rent from long-term leases, applying the income capitalization formula.
Depth Tables
- Illustrate how property value diminishes with additional depth loss; the "4-3-2-1 Method" is a simplified evaluation technique for assessing depth value.
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Description
Explore essential terms and definitions related to site valuation in real estate. This quiz covers concepts such as Highest and Best Use, providing insights into property valuation and its implications. Perfect for those looking to deepen their understanding of real estate appraisal.