Property ValuationIntermediateCalifornia Exam

The principle of substitution in appraisal holds that:

AA property's value is determined solely by its income-producing potential, per standard California valuation practice
BA buyer will not pay more for a property than the cost to acquire an equally desirable substituteCorrect
CValue increases when supply decreases and demand increases, under standard appraisal methodology
DLand is permanent and always increases in value over time, as typically applied in a comparative market analysis

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

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

The principle of substitution is the foundation of all three appraisal approaches. It holds that the maximum value of a property is set by the cost of acquiring an equally desirable and valuable substitute.

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.

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