How Highest and Best Use Can Yield a Real Estate Investing Profit

jim kobzeff

Feb 2, 2014

Highest and best use is an important concept in real estate that should be understood in the process of making a real estate investment.

Simply put, highest and best use for real estate can be defined as the best economic use of a property with respect to what is legally and physically possible at any given time.

We have all driven through an area where commercial buildings surround a lowly single-family home. The current use of the property might be residential, and at face value, worth no more than other similar single-family homes throughout the city, but this is undoubtedly not the highest and best use for the property. A change in zoning or other regulations that would allow the owner to convert the property to commercial use can indeed increase the property value dramatically when it becomes commercial real estate.

Understanding that developed property can have more than one use can yield a hidden profit, and there are some situations that would warrant an investor to consider that the highest and best use with respect to a property might not be its current use.

  1. A house or small units on a commercial or industrial lot
  2. A house or small units on a large lot zoned for a larger multiple unit complex
  3. A property where the parcel map shows the building sitting on two or more separate tax lots
  4. A four-plex that actually consist of two duplexes on separate tax lots
  5. An apartment with large enough unit's to configure and add a second or third bedroom
  6. A rental property where zoning permits additional extra units

The mathematics, of course, will vary greatly due to local restrictions, building setbacks, green belt requirements, parking codes and such, to the extent that each property has a different end result.

Nonetheless, real estate investors should always consider the highest and best use for a property and understand that its real value (and profitability) might lie just beneath the surface. If not immediately, perhaps in the nearby future.

james kobzeff author

James Kobzeff
Jim is a former realtor with over thirty years real estate investment property experience. He is the developer of ProAPOD's real estate investor software solutions.