Which statement best describes the principle of substitution in real estate appraisal?

Which statement best describes the principle of substitution in real estate appraisal?

• A. A buyer won't pay more for a property than the cost of an equally desirable substitute.
• B. The market value of a property is the same as its list price.
• C. Capitalization rate is calculated by dividing net operating income by property value.
• D. A property's GRM is determined by multiplying gross rent by the number of units.

Answer: (A)

Substitution is the idea that a buyer won’t pay more for a property than the cost of an equally desirable substitute. In practice, this means value is anchored by what buyers would pay for comparable properties in the same market. Appraisers use recent sale prices of similar homes and then adjust for differences in features, condition, and location. If a nearby comparable sold for less, the subject property’s value tends to align with that range, unless there are compelling reasons to justify a higher price. This principle underpins the sales comparison approach and explains why market value is driven by what buyers can obtain with comparable substitutes. The other statements describe different appraisal concepts (like market value versus list price, or specific calculations), not substitution.

Substitution is the idea that a buyer won’t pay more for a property than the cost of an equally desirable substitute. In practice, this means value is anchored by what buyers would pay for comparable properties in the same market. Appraisers use recent sale prices of similar homes and then adjust for differences in features, condition, and location. If a nearby comparable sold for less, the subject property’s value tends to align with that range, unless there are compelling reasons to justify a higher price. This principle underpins the sales comparison approach and explains why market value is driven by what buyers can obtain with comparable substitutes. The other statements describe different appraisal concepts (like market value versus list price, or specific calculations), not substitution.