Property Valuation
The principle of substitution in appraisal states that:
AA. A property's value increases as more substitutes become available
BB. A buyer will pay no more for a property than the cost of an equally desirable substitute✓ Correct
CC. Older properties always have lower value than newer ones
DD. All comparable properties must have sold within 90 days
Explanation
The principle of substitution holds that the maximum value of a property is set by the cost of acquiring an equally desirable substitute—the basis of the sales comparison approach.
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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.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
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