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Valuation & Market Analysis term

Highest and Best Use

The legally permissible, physically possible, and financially feasible use of land that produces the greatest value.

Why Highest and Best Use matters on the exam

This term belongs to Valuation & Market Analysis. The questions below are real items from Freehold's bank that use it - each one cites its source.

Exam questions using Highest and Best Use

Every Freehold question shows why the right answer is right — and cites its source.

The highest and best use of a parcel of land is the use that is:

  1. The most expensive use the owner can imagine
  2. The use that requires the least amount of capital investment
  3. Legally permissible, physically possible, financially feasible, and maximally productive
  4. Whatever use the current zoning designates, regardless of profitability
Show answer & explanation

Legally permissible, physically possible, financially feasible, and maximally productive — Highest and best use is defined by four tests applied in sequence: the use must be legally permissible, physically possible, financially feasible, and, among the feasible uses, the most profitable.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

A structurally sound older single-family home sits on a large lot in an area recently rezoned for high-density multifamily development. A developer demolishes the home to build an apartment building. This decision most directly reflects:

  1. Functional obsolescence in the cost approach
  2. Physical deterioration of the site
  3. The principle of conformity
  4. A change in the highest and best use of the land
Show answer & explanation

A change in the highest and best use of the land — When zoning and market conditions change, the highest and best use of land can shift; here the land's most profitable legal use became multifamily development, making demolition of the existing home economically rational.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

Which of the following is NOT one of the four tests used to determine highest and best use?

  1. Requires the lowest construction cost
  2. Physically possible on the site
  3. Fully legally permissible under zoning
  4. Maximally productive in financial terms
Show answer & explanation

Requires the lowest construction cost — The four highest and best use tests are legal permissibility, physical possibility, financial feasibility, and maximum productivity; lowest construction cost is not one of the required tests.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

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