Highest and Best Use - Vacant and Improved

Vacant and Improved

The Test of Highest and Best Use is applied to an improved properties both as improved and as if vacant. Vacant properties are generally only given the as vacant test. The Highest and Best Use as vacant may be the same or different as the Highest and Best use as improved.

For example, house A in a residentially zoned area may have a highest and best use as vacant and a highest and best use as improved that are both residential. A similar house B in a commercially zoned area may have a highest and best use as vacant as a commercial lot and highest and best use as improved as a single family residence.

If the value of the commercial lot as vacant in "House B" exceeds the value of house as a residence as improved plus demolition costs, the overall highest and best use of this property would be the as vacant value of the commercial lot. For example, assume that "House B" has a value as a house of $200,000, and a site value as a commercial lot of $250,000 with a cost to demolish the house and prepare the site at $25,000. The highest and best use of the site is to demolish the house and sell the site as a commercial lot. The market value would be $225,000 ($250,000 site value minus $25,000 demolition cost). However, if the demolition costs rose to $55,000, the highest and best use would be the existing residential use, because the value as a commercial lot (now $195,000) would not exceed the existing value as a residence.

This would be the highest and best use of the property, even though it is contrary to what actually exists.Even if the house is not razed and the site sold as a commercial lot, the highest and best use is the commercial lot use. The market value of the property is driven by this hypothetical conversion, even if it never takes place due to the utility that this potential conversion would bring to a purchaser.