Property Valuation
The 'principle of substitution' in appraisal states that:
AA property's value is set by government assessment
BA buyer will pay no more for a property than the cost of an equally desirable substitute✓ Correct
CMarket value equals replacement cost
DLand value increases as improvements age
Explanation
The principle of substitution underlies all three appraisal approaches: a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute in the open market.
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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.
Deed of TrustA security instrument used in many states instead of a mortgage, involving three parties: borrower (trustor), lender (beneficiary), and a neutral trustee.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
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