The words “Highest and Best Use” don’t seem to create a lot of flurry or excitement. I see any sellers and even agents marketing property for what it is, without really exploring other potential uses. As a result, it costs them in the long run when it comes time to sell or lease.
The “Highest and Best Use” for a property takes into consideration all aspects of the different features and available options for a particular property, including the costs for each scenario. On a deeper level, this also factors in the current market, economic influences and external factors for each of those scenarios for a truly accurate picture of potential value.
So, what is “Highest & Best Use?” Well, to start, the use must be legally allowed, physically possible, and financially feasible in order to even make it on the list of options. Once you are aware of what could be possible, then you can factor in costs and returns, to figure out which one is maximally productive and generates the best return to you as an investor or owner.
It could be as simple as re-zoning a property from rural forested land to an industrial use, because maybe the neighbor is Weyerhaeuser or a gravel pit or other industrial uses. (This was actually the exact scenario I just finished a few days ago). Sometimes it is much more complex when you have to consider the rental rates and vacancies for an office space versus retail space versus maybe converting to a mixed use building with additional living space above (which is something I look at for buildings all over Western Washington almost weekly). You need to do a little homework to determine how each of those markets are behaving in real time and take a look at where things are trending. This can be anything and everything from the zoning uses and direction the city is expanding, available public utilities, other planned developments in the area, road expansion, potential costs for each scenario, demographics for the area, and the market for each of those types of property or scenarios.
It is important to note that the option with the most costly building or highest net operating income is not necessarily the best use. You need to consider the relationship among all the variables to determine which one maximizes the overall return to the site. For a basic example, let’s say one building costs $1,000,000 to build and the other costs $800,000 to build, but they both generate the same net operating income after all expenses. Even if it’s prettier to look at, you probably do not need to build the one for $1,000,000.
We will look at an example much more in depth at a future date that will compare different values and returns to the land versus the buildings, so you can get an idea of how to segregate your returns and really determine what the value to a piece of land might be versus the potential or existing building.
Of course on the other side, I have gone through various scenarios with clients with ways that can increase their overall value and returns, and after reviewing the options they decide to just take the value as-is. They decide it is worth their time to let the buyer or tenant take on the expense of increasing the value and are happy to exchange the lower return with less involvement.
Each situation is unique and there is not a one size fits all answer for real estate. No matter what your decision may be, make sure you have a competent real estate professional working with you, so you can compare your options and determine the best use and greatest value to you for a property in question.
If you need help determining some of the potential options or just need general information for the real estate market, give me a call at (206) 293-1005 or email me at Jen@HudsonCREG.com.