Highest and Best Use

Highest and best use is the legally permitted, physically possible and financially feasible use that produces the greatest value for a property. Appraisers settle it before choosing a valuation method. A gross rent multiplier assumes the answer is the current rental use, priced on the rent the building earns today.

When that assumption holds, GRM is a fair shortcut. When it does not, the multiplier misleads. A small rental house on a lot zoned for eight units may sell at a GRM of 15 or more, because buyers are paying for the land and the density, not the $4,000 a month the house brings in.

An unusually high GRM in a listing is often a sign that the market sees a better use than the one in place. Before calling a property overpriced on rent, check the zoning and what similar lots have sold for. The rent may be the least important number in the price.

Further reading: Highest and Best Use on Wikipedia.