Property ValuationIntermediateAlabama Exam

The principle of substitution states that:

AOne property can be substituted for another in a 1031 exchange

BA buyer will not pay more for a property than the cost of an equally desirable substituteCorrect

CDepreciation substitutes for physical deterioration

DA seller can substitute a new buyer after a contract falls through, under standard practice

Why A buyer will not pay more for a property than the cost of an equally desirable substitute Is Correct

Answer B: A buyer will not pay more for a property than the cost of an equally desirable substitute

The principle of substitution is the foundation of all three appraisal approaches — a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. This principle drives competitive market pricing.

Exam Tip: Property Valuation

Valuation questions focus on the three approaches to value: sales comparison, cost, and income. Know which approach is best for which property type. The income approach uses cap rate and NOI — memorize these formulas.

Key Property Valuation Terms in This Question

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

Depreciation

A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.

1031 Exchange

A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.

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