Repurposing for highest and best use

By: J. David Chapman/January 5, 2023

My favorite concept in real estate is “highest and best use.” I like to teach it because this is a method to build value. If you have ever heard me speak, or read my material, or have been in my classroom, you will know that I don’t promote the “flip” concept that took real estate by storm many years ago.

The traditional flip approach to real estate dictates that you must buy at a low price and quickly sell the property for more money. Some perform work to their property to increase its value. Some, however, never even take title to the property, do nothing to increase the value, and sell it for a profit. This is known as the “wholesale” approach to real estate. It seems to me that you either need to take advantage of someone on the buy side or the sell side. I don’t like either.

The concept that I teach, and allows me to sleep better at night, is a buy-and-hold strategy. This strategy depends on property management, time and inflation, and frequently involves repurposing the asset to create an increase in value. When I have been most successful at this is when I have found and purchased a property that I believed was not being used for the “highest and best use.”

Sometimes, I dream that I bought an old lighthouse, fire station, small manufacturing facility, or old barn that the city has encroached upon and I’ve repurposed these buildings into something that the location and population will appreciate and that will fill a need in the community. It is upsetting to wake up and realize that I did not actually buy any of those assets, and I was not successful in transforming them into something really cool.

I actually have been successful on a couple of occasions. At Grand Lake, we had the opportunity to purchase a facility on the lake that had been used to manufacture small aircraft and converted it to a very successful short-term rental home. In Edmond, I was able to purchase a couple of boarded-up wood frame homes and transformed them into a three-suite micro retail center called Shoppes at Clegern. In the last case, three entrepreneurs have built amazing businesses in that little center. The success of small businesses in these repurposed assets is what really gives me satisfaction and defines “highest and best use.”

J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma(jchapman7@uco.edu).