Property Valuation
What is the 'principle of substitution' and why is it important in appraisal?
AThe idea that improvements can be substituted for each other without cost
BThe principle that a buyer will not pay more for a property than the cost to acquire an equally desirable substitute property; the foundation of all three appraisal approaches✓ Correct
CThe rule that appraisers must use a substitute method when data is scarce
DThe concept that sellers can replace one buyer with another
Explanation
The principle of substitution is foundational to all three appraisal approaches: buyers won't pay more for a property than the cost of an equally desirable alternative (whether purchasing a comparable, building a replacement, or investing elsewhere). It sets the upper limit of value.
Related California Property Valuation Questions
- In a 'buyer's market,' real estate prices tend to:
- A property has a GPI of $120,000, 5% vacancy and credit loss, and operating expenses of $45,000. What is the NOI?
- Functional obsolescence refers to:
- The principle of substitution states that:
- Plottage value (assemblage) occurs when:
- In the cost approach, 'reproduction cost' differs from 'replacement cost' because:
- When adjusting a comparable sale in the sales comparison approach, an appraiser ADDS value to the comparable when the comparable is:
- The cost approach to value is best suited for:
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