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

The term 'highest and best use' in real estate refers to the use of a property that yields the maximum return or value. This concept is central to property valuation and investment analysis because it assesses how a property can be utilized to generate the greatest economic benefit. The highest and best use considers factors such as location, the property’s physical characteristics, potential demand, market trends, and zoning regulations.

When evaluating the highest and best use, it’s not merely about what is legally permissible; it also takes into account the market's perspective on what would generate the most income or value. This distinction sets it apart from a legal use of the property, aesthetic considerations, or zoning allowances, as those aspects might not align with maximizing financial returns for the property owner.

Identifying the highest and best use involves a comprehensive analysis of various factors influencing real estate value and does not solely rely on what is designated by existing zoning laws or the current physical attributes of the property.