Property ValuationIntermediateCalifornia Exam

In real estate appraisal, what does 'highest and best use' mean?

AThe use that generates the most rental income, per standard California valuation practice

BThe most profitable legally permitted, physically possible, financially feasible, and maximally productive use of a propertyCorrect

CThe use designated by the city's general plan, under standard appraisal methodology

DThe current use of the property, as typically applied in a comparative market analysis

Why The most profitable legally permitted, physically possible, financially feasible, and maximally productive use of a property Is Correct

Answer B: The most profitable legally permitted, physically possible, financially feasible, and maximally productive use of a property

Highest and best use is the use that produces the highest value while being (1) legally permitted, (2) physically possible, (3) financially feasible, and (4) maximally productive. Appraisers determine highest and best use before selecting their valuation approach.

Exam Tip: Property Valuation

Valuation questions focus on the three approaches to value: sales comparison, cost, and income. Know which approach is best for which property type. The income approach uses cap rate and NOI — memorize these formulas.

Key Property Valuation Terms in This Question

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

People Also Study

Key Terms to Know

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

Capitalization Rate (Cap Rate)

A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.

Gross Rent Multiplier (GRM)

A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.

Comparable Sales (Comps)

Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.

Math Concepts

Profit & Loss

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Property Valuation Guide

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