Real Estate Council of Alberta Fundamentals Practice Exam

Which principle considers legal permissibility and financial feasibility when assessing use of property?

1. Principal of Supply and Demand

2. Principal of Substitution

3. Principal of Highest and Best Use

4. Principal of Increasing/Decreasing Return

The correct answer is: Principal of Highest and Best Use

The principle that considers legal permissibility and financial feasibility when assessing the use of property is the principle of highest and best use. This principle is fundamental in real estate valuation and analysis because it evaluates how a particular property can be utilized in the most profitable manner, taking into account not only legal restrictions—such as zoning laws—but also the economic viability of potential uses. Determining the highest and best use involves assessing various factors including market demand, location, and the physical characteristics of the property. The goal is to identify the use that would generate the most value or income, ensuring that it aligns with applicable laws and regulations, while also being financially feasible within the current market conditions. This principle plays a significant role in appraisals and investment decisions, guiding stakeholders toward informed decisions about property development, renovations, or sales. Other principles mentioned, such as supply and demand or substitution, do not directly incorporate both the legal and financial aspects in the same comprehensive way as the principle of highest and best use, making it uniquely holistic in its assessment approach.