Recognizing Potential for Highest & Best Use

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One of the standards used by appraisers in property valuation is “highest and best use.” One definition is: “The Appraisal Institute defines highest and best use as follows: The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value.”

We don’t often bump into a residential investment property that doesn’t represent its highest and best use, but they are out there. When we recognize one, we may have an advantage over our competition. They will be evaluating it “as-is,” instead of how it could be. In these situations, the actual value of the property if converted to its highest and best use will always be higher.

This doesn’t mean converting homes to offices if zoning permits it. Instead let’s talk about one example, small homes on large lots. Your investor competitors may be passing on a property because the home is small and the larger land size increases the cost, making it a poor rental investment. Their error could be in thinking of the as-is property as the only way they can do a deal.

What if we consider other options. If the home is ready to rent and not in need of rehab, and if subdivision rules allow it, we may be able to cut off a full lot and sell it to a builder for extra profit. If the home needs work, the income from the sale of the lot can fund the work, including in this case the addition of a room or two to make the home more appealing to tenants. Either way, just recognizing the potential puts you on track for a profitable deal that others passed over.

Large Homes to Rental Splits

Have you noticed the rise of online vacation rentals that are private homeowners renting out parts of their homes? Sites like AirBnB.com, HomesToGo.com and HomeAway.com have grown to be huge marketplaces. The sites handle the online marketing and billing, while the owners handle the cleaning and welcoming of guests. These homeowners are making excellent incomes from rental of their guest houses or house portions that have their own private entrances.

When you come across a large home with multiple entrances, there could be potential in your rehab to create a separated space that is secure from the main house, has its own mini-kitchen and a bathroom. This is all that is needed to make it a rental on one of these sites. Of course, before you even consider it, check local laws, subdivision and HOA rules to make sure it is allowed. You can add value to the property spending little more than you would have put into the rehab in the first place.

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