UP Standards

1.5. Application of Approaches to Value. The following sections outline the standards for the application of the three approaches to value. The approaches to be used to value land as if vacant are presented first. The application of the sales comparison approach, the income capitalization approach, and the cost approach for the valuation of the property as improved follows.

1.4.7. Highest and Best Use Conclusion. In reaching a conclusion regarding a property’s highest and best use and regarding the larger parcel, the appraiser must identify the most probable buyer and/or the most probable user of the subject property under that highest and best use. The appraiser must also reach a conclusion concerning the timing of any highest and best use that is different than the current use.

1.4.6. Larger Parcel Analysis. Essential to the appraiser’s analysis of highest and best use is the determination of the larger parcel. These Standards define the larger parcel as that tract, or those tracts, of land that possess a unity of ownership and have the same, or an integrated, highest and best use. The larger parcel is that tract of land which possesses a unity of ownership and has the same, or an integrated, highest and best use. Determining unity of ownership may require legal instruction. Elements to be considered in determining the larger parcel are contiguity (or proximity) as it bears on the highest and best use of the property, unity of ownership, and unity of highest and best use. …

1.4.5.1. Economic Use.For purposes of just compensation, opinions of market value must be based on an economic highest and best use. Therefore, appraisals in federal acquisitions cannot be based on noneconomic or nonmarket uses. To be an economic use, the use must contribute to the property’s actual market value, and there must be competitive supply and demand for that use in the private market. Whether or not a particular use is economic and therefore appropriate to consider depends on the relevant market, not the use itself. This topic is discussed in depth in Section 4.3.2.3. 

1.4.5. Four Tests. First, the appraiser should form an opinion of the highest and best use of the land, as if vacant. If the land is improved, the appraiser forms an opinion of the highest and best use of the property, as improved. The highest and best use of some property cannot be reliably estimated without extensive marketability and/or feasibility studies, which may require the assistance of special consultants in particularly complex assignments.46 To be a property’s highest and best use, the use must be (1) physically possible; (2) legally permissible; (3) financially feasible; and (4) must result in the highest value. Each of these four tests must be fully analyzed in the appraisal development process. A property’s highest and…

1.4.4. Definition. For just compensation purposes, market value must be determined with reference to the property’s highest and best use, that is,45  The highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future.

1.4.3. Highest and Best Use. The appraiser’s determination of highest and best use is one of the most important elements of the entire appraisal process.44 Therefore, appraisers must apply their skill with great care and provide market support for the highest and best use conclusion(s) developed in the appraisal.

1.4.2. Marketability Studies. In complex or unusual appraisal problems, a marketability study may be required as part of the scope of work. Marketability studies are often required for appraisals of properties located in transitional areas, properties that contain special-use improvements, or properties for which the highest and best use is unclear without in-depth study. In acquisitions referred to the U.S. Department of Justice, a marketability study will be required.  A marketability study should include a detailed analysis of the subject property and its economic environment. This should include an analysis of the potential physically possible and legally permissible uses of the subject property and its competitive position within the market. A detailed supply and demand analysis should be developed for…

1.4.1. Area and Neighborhood Analysis. In developing an area and neighborhood analysis, the appraiser must identify the characteristics of the area or neighborhood that directly influence the subject property. These data (demographic and economic) should include only the information that directly affects the appraised property, together with the appraiser’s conclusions as to significant trends. The use of “boilerplate” or general demographic and economic data is unnecessary and should not be included unless the specific data directly impacts the current market value of the subject property. As discussed in Section 4.6 and Section 1.2.7.3.3, the appraiser must disregard changes in the neighborhood brought about by the government’s project for which the subject property is being acquired. This specific standard regarding government…

1.4. Data Analysis. A well-supported market analysis is a critical element in every appraisal prepared under these Standards. The data and analysis developed in this process are fundamental to the highest and best use and the larger parcel analyses that follow. The area and neighborhood analysis leads directly to a more detailed marketability study focused on the market characteristics of the subject property. Market decides the use. Use determines value.