Highest and Best Use (HBU) is a familiar concept to property pros like developers, valuers and selling agents.
It’s also a concept that ‘regular Joe’ home buyers and investors can benefit from too.
The formal definition is too painfully long winded to bother with here. Suffice to say that evaluating your next potential property purchase with a Highest and Best Use mindset can give you an edge to assess value, think about the future and avoid purchasing just on emotion.
HBU thinking is based on productivity and a simple question- what is the maximum yield of the land you are considering buying? Where yield commonly refers to profitability, or number of people housed.
A typical example is a purchasing a block of land that is, or soon will be sub divisible for several homes or suitable to build apartments.
Other examples include a lot with the capacity to add a granny flat or studio over garage, or a residence suitable to be converted to dual occ or a new gen boarding/rooming house.
HBU thinking can be as straightforward as aligning a properties’ use with the demographic such as converting to mixed use in a locality where live/work is the norm. Or on a more micro level simply reconfiguring a dwelling to improve liveability and energy efficiency by better capturing light, breeze and views. One clever application of HBU thinking witnessed recently was the addition of penthouse apartments to an old strata block with the sale proceeds generating the capital required to remediate the whole building. This saved the owners more than $100k in special levies and added fifty years to the life of the building.
HBU mindset usually involves some research and digging around. It’s surprising what you’ll find in local council meeting minutes and community publications. A review of a few years worth of development applications doesn’t take long and can reveal changes to zoning, heritage status, parking, public transport and public space that could also set precedent for your future works.
Increasingly HBU means increasing space for the public domain & community use and we are seeing enlightened builders incorporate surfboard and bicycle storage, exercise zones vegetable gardens, workshop space and tool sheds into their apartment complexes rather than maxing out the ‘sellable’ sqm footprint. This will be a continuing trend in a post COVID world where the definition and value of home has changed.
Highest and Best Use Thinking is really just seeing the potential of a property to its logical conclusion- considering the limitations of the environment, cultural norms, and the prevailing legislation.
Exploring all the ways that value can be added and calculating what the return on the investment may be will help you to make a more informed purchase decision and stack the odds in your favour to realise outperforming capital gains down the track.