What does the term "highest and best use" refer to in appraisals?

The term "highest and best use" in appraisals specifically refers to the most profitable legal use of a property. This concept is fundamental in valuation because it determines the value of the property based on what it could realistically be used for to yield the greatest return on investment or economic benefits.

In practical terms, highest and best use encompasses four criteria: legality, physical possibility, financial feasibility, and maximum profitability. A property is considered to have its highest and best use when it meets all of these criteria, ensuring that the use is not only allowed by zoning laws but also economically viable and physically possible.

Understanding the highest and best use is essential for appraisers because it guides the valuation process and helps ensure that the appraisal reflects what the property can achieve in its most effective use scenario.