Highest and Best Use (HABU) is a principle in real estate and business appraisals that means the true value of a property is whatever value the property would have if it was to be put to its highest and best use.
So for instance, your grandmother might be selling her old house. As a house, the property is ok. It’s a little run-down and dated and the bedrooms might be a little small. As a house it’s probably worth slightly less than similar houses that are a little more modern.
But the house sits on 3 acres of land and this land is zoned for high density residential units (townhouses, apartments, condos). As raw sub-dividable acreage the property could be worth many times what the house might otherwise sell for.
The actual value of the property isn’t the house itself. It’s in the land.
In fact, the house itself might be in the way of the highest and best use of property.
Individuals aren’t any different. You also have a highest and best use. It is the true value of your time if you were to work doing the activity that brings you the most money.
And just like Nana’s house, most likely there are activities that you are doing right now that get in the way of your highest and best use.
How to Find Your Highest and Best Use:
1. Think of all of the activities you can do to make money.
If you work for someone else this would obviously include your day job – your full-time employment – yet, it could also include any freelance work you do on the side, or a part-time job. It could be something you do right now as a hobby or as volunteer work that you could make money doing if you decided to charge people for your work.
If you’re self-employed it gets a little more fuzzy.
Let’s say you run a small e-publishing operation, or you’re a freelance web developer. As part of this job you’re engaged in some activities where you make money (sales, delivering goods, providing services, etc.) and some activities where you aren’t making money (accounting, marketing, clerical duties, etc.).
Now, you might think that your highest and best use is the activities you do to make money. But it’s actually probably only ONE of those activities. Maybe you’re better at writing e-books than you are at sales. Or maybe you’re better at sales than building websites. Maybe your having to build the websites gets in the way of you making the most money by selling the web development work in the first place.
You might also want to list all of the activities you are qualified to do, but aren’t yet doing at all. You might be an accountant at a regional construction company, but you were once a teacher and you’re qualified to be the principle of a suburban high school. For the purposes of this activity you should list the job of principal in your money making activities.
2. After making a list of all of the money making activities you’re capable of doing, you need to assign an hourly dollar amount.
There are a few ways to figure this out if you don’t already have a figure in mind. The best way is to take a look in the marketplace to figure out what people are paying. Figure out what you’d pay for someone to do the particular activity, and then figure out how much money someone would pay you to do it for someone else.
If you make a product, just multiply the profit you make per product by the amount of products you can make in a day.
3. Once you have an hourly wage, simply multiply it by your monthly or annual hours worked.
Even if you don’t currently work that many hours in a month for that particular activity, it’s ok. The point of the exercise is to determine the most valuable use of your time. We’re making a basic assumption that you are able to work at full capacity. That the demand for your highest and best use is high enough and constant enough for you to work doing it full time – even if its not right now, or ever.
Whatever activity provides the highest amount of money is your highest and best use.
You might find that even though you make a good living working independently, you might be better put to use working as a sales manager for an international conglomerate. Or, you could find the opposite to be true.
Passion is greater than Highest and Best Use
So what if you don’t like my highest and best use?
You might absolutely love working independently and the idea of working for a big conglomerate depresses you.
That’s ok. This is an exercise in possibility – about exploring all options from every angle.
This is an exercise about figuring out if your current activities are in the way of your highest and best use.
If you don’t like your highest and best use activity, then don’t do it. Go down to the activity you absolutely love to do and use that as your highest and best use. And work to get all of the other activities out of the way by elimination, automation or delegation. Then figure out how to get to full capacity.
And don’t fret that you aren’t maximizing your working hours to making the most money you can make. Do what you love.
There isn’t anything wrong with Nana’s house staying secluded on her 3 acres of land.
Photo above: My Nana’s house and the place of so many childhood and adult memories. Currently for sale to the highest bidder.