What does the term "highest and best use" refer to in real estate valuation?

The term "highest and best use" in real estate valuation is specifically related to determining the most profitable use of a property. This concept takes into account not only the potential financial returns that the property can generate but also evaluates whether that use is legally permissible, physically possible, financially feasible, and maximally productive.

In this context, the highest and best use is essential for appraisers and investors, as it informs valuation by assessing how a property can contribute most effectively to its market value. By identifying the use that would yield the highest return while conforming to various constraints—like zoning regulations and physical capabilities—appraisers can provide a more accurate estimate of the property’s worth.

This definition sets "highest and best use" apart from considerations related to the property's physical condition, applicable zoning laws, or the market values of surrounding properties, which, while important in their own right, do not capture the essence of how a property can be utilized in the most economically productive manner.