The heart of any real estate evaluation is the highest and best use analysis. According to economic theory, land value is based its highest and best use as if vacant. The value of the improvements, on the other hand, is based on how they contribute to the value of the land. Going along with this theory, real estate achieves its highest value when the land and improvements are in balance. However, In the real word, land and buildings rarely form a perfect match.
Some mismatched properties have great potential.
Consider, for example, a commercially zoned property with an old house on it, a remnant from the days before zoning. The house could be rented, converted to a restaurant or an office, or demolished and replaced with a retail store. The highest and best use depends on what is legally allowed by planning and zoning regulations, what is physically possible to construct, what is financially feasible, and what produces the most income. The best decision might be to keep renting the building as a house, especially If there is a tight rental market and lots of struggling restaurants and vacant office buildings. This is what s called the interim highest and best use.