Valuation Accuracy Questionable if No Highest and Best Use Analysis

Not identifying a property’s highest and best use when assessing its market value is the fourth key factor that can impact the valuation accuracy of a property. In other words, a property’s market value will reflect its highest and best use. The International Valuation Standards (IVS) defines highest and best use as “The use of an asset that maximises its potential and that is physically possible, legally permissible and financially feasible.”    

A property’s current usage, continuing use or a different use could be the highest and best use. When determining the price at which it would be willing to bid, a potential buyer would consider the use that it would have for the property.

Example 1  

Two semi-detached weatherboard dwellings with a brick clad façade sited on a corner land parcel along a main road, converted for their current use as a milk bar. Its neighbourhood is predominantly residential in nature.

Highest & Best Use  

Development site for a boutique apartment building (assuming it meets zoning restrictions and Council approval). 

Wrong Value Outcome  

If valued as an income-generating retail property.  

Example 2   

An industrial warehouse currently used as part retail showroom and part warehouse. It is located adjacent to and opposite residential properties.

Highest & Best Use  

Convert into residential use (assuming it meets zoning restrictions and Council approval)  

Wrong Value Outcome  

If valued on the basis of its current commercial uses.