Highest and best use is the most probable use of a property that is physically possible, legally permissible, financially feasible and maximally productive. It is a core principle in appraisal theory and directly shapes how a property is valued.
In practice, appraisers analyze highest and best use in two stages: first as if the site were vacant, then as it is currently improved. When the existing use aligns with highest and best use, the improvements contribute positively to value. When it does not, the current structure may represent an underimprovement, overimprovement or a use that no longer reflects market demand.
When a property's current use diverges from its highest and best use, collateral assessment and comparable selection become more complex. Appraisers must clearly support their highest and best use conclusion, as it sets the analytical foundation for every valuation decision that follows — and is among the first elements underwriters and reviewers will scrutinize.