What principle states that property value is influenced by the average of all compatible uses?

The concept of highest and best use is critical in property valuation, as it reflects the most profitable and feasible use of a property based on zoning regulations, market demand, and the physical characteristics of the property. This principle asserts that the value of a property is not solely determined by its current use but is greatly influenced by what the property could potentially be used for in a manner that is financially beneficial.

When evaluating the highest and best use, the analysis considers the potential for all compatible uses of the property and identifies which one would yield the greatest return on investment while being legally permissible and physically possible. This comprehensive view helps appraisers and assessors determine a more accurate market value since it incorporates the demand for various uses within the context of their surroundings.

In contrast, market value refers more specifically to the price at which a property would sell in the open market, typically informed by trends and sales of comparable properties. Replacement cost involves calculating what it would cost to replace the property with a similar one, without addressing potential uses. The cost approach estimates value based on property replacement costs minus depreciation, but it does not inherently account for potential uses that could affect value significantly.