Property Usage Explained
In Real Estate the property usage is sometimes referred to as the highest and best use. They are different things and should be treated as such.
Property usage is what a property is being used for or should be used for to acheive the highest and best use of the property. There are 3 basic types of property usage in Real Estate.
The main types of usage are vacant, owner occupied, or tenant occupied.
Vacant Usage
This is the most obvious usage to show the property usage and highest and best use are different. Vacant land won’t produce income. The highest and best use may be development or agricultural.
Vacant land does have appeal to investors because there is a limited supply. Land buyers usually wind up being institutional investors not home builders. Since the supply is finite it will always have value without detrimental effects from deferred maintenance. Land only suffers when in a location where building or agriculture are not possible or practical. You aren’t going to farm in a city and large cities typically don’t have new construction unless habitat is building.
If you buy vacant land understand you are buying equity not income. If you are negotiating a deal for land remember you are negotiating without income in the near future. Act like the buyer that will have to wait 6 months to a year for any type of return on the investment when dealing with sellers.
Owner Occupied Usage
This is the area that can have the most appreciation in residential property. It is the predominant usage in residential since more people own homes than rent. This may be the highest and best use of the property since value can be added and/or maximized.
This doesn’t mean the usage couldn’t be tenant occupied in the event you wholesale the house. If you see a handful of houses in close proximity you can always devalue the house with the owner by saying renters are moving in the area for a lower sales price. You aren’t determining the end usage of your investor but rather pointing out a fact of the area. It’s a simple way to change their way of thinking from what they see on Zillow.
Tenant Occupied
This property usage is the only potential usage that can be residential and commercial. Every commercial structure occupied is tenant occupied. Even if the building is owned by the occupant they are acting as a tenant for the tax write-off.
Houses can also be rented and become tenant occupied. If you are working on a deal with an investor to buy or sell you can always point out the potential usage and current usage. You can tell your seller the house isn’t worth as much because of the condition and because it’s rented. You could get more if it was vacant and listed it with an agent. As for the seller, you can tell them it’s worth more vacant and with an agent resell. In the meantime collect rent until their lease expires or they move out. You told both, buyer and seller, the same thing but in different ways. Read the paragraph again.
Final Thoughts
Property usage is often misinterpreted. It is part of the highest and best use. The usage determines the highest and best use. Without usage there wouldn’t be a highest and best use.
It’s important to understand the difference in current and potential usage. By understanding the differences you are able to maximize the profit on your deals. You only make half of what you could by applying the sales tactic to the buyer. It also applies to the seller. A fact of Real Estate – until something is remedied(fixed) it will always be there and cause problems to whoever owns it. It’s like having a break in the chain of title. If a buyer believes there is a problem it’s up to you to fix it and be able to maximize the deal to buyer. It lower the sales price to fix issues with sellers and raises the sales price to buyers when there aren’t any issues. You have to fix the issue for everyone involved for maximum profit.
As soon as you learn to become the usage mediator and sell positive and negative property usage in your deals you will increase your spreads.
