Property Valuation
What is the principle of 'substitution' in real estate appraisal?
AA property's value is set by the cost to substitute it with an identical one
BA buyer will pay no more for a property than the cost of acquiring an equally desirable substitute✓ Correct
CA new property always substitutes the value of an older one
DBuyers must accept the appraised value without negotiation
Explanation
The principle of substitution states that an informed buyer will pay no more for a property than the price of a comparable substitute that provides equal utility. This principle underpins all three appraisal approaches.
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Key Terms to Know
Appraisal
A professional estimate of a property's market value prepared by a licensed or certified appraiser.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Deed of TrustA security instrument used in many states instead of a mortgage, involving three parties: borrower (trustor), lender (beneficiary), and a neutral trustee.
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