Property Valuation
What is 'highest and best use' in real estate appraisal?
AA. The current use of the property, which is presumed to be the best
BB. The legally permissible, physically possible, financially feasible, and maximally productive use of the property✓ Correct
CC. The most expensive possible improvement that could be built on the land
DD. The use that generates the highest gross income
Explanation
Highest and best use is the use that is: (1) legally permissible, (2) physically possible, (3) financially feasible, and (4) maximally productive (generates the highest land value). Appraisers analyze the property both as vacant and as improved to determine the highest and best use.
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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.
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