Property Valuation
The principle of substitution in appraisal states that:
AA property's value is determined by government assessment
BA buyer will pay no more for a property than the cost of acquiring an equally desirable substitute✓ Correct
CProperties appreciate at the rate of inflation
DLand value never depreciates
Explanation
The principle of substitution underlies all appraisal approaches: a rational buyer will pay no more for a property than the cost of obtaining an equally desirable substitute property.
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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.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market 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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