Highest and Best Use

Highest and best use is the appraisal principle that a property is worth the most under the use that is legally allowed, physically possible, financially feasible and most productive. For a BRRRR investor it frames the rehab: the goal is to turn the house into the version buyers and appraisers will pay the most for.

Appraisers analyze highest and best use before valuing a property. A dated three-bedroom in a neighborhood of renovated homes has room to gain; adding a bedroom or bathroom where zoning and layout allow can raise the after-repair value more than cosmetic work alone.

Over-improving is the opposite mistake. Finishes far above the neighborhood standard rarely appraise for what they cost, and every dollar of rehab that does not show up in value is cash left in the deal after the refinance.

Further reading: Highest and Best Use on Wikipedia.