Property Valuation
The principle of substitution holds that:
AProperty values increase with demand
BA buyer will pay no more for a property than the cost of an equally desirable substitute✓ Correct
CSimilar properties in a neighborhood tend to level each other's values
DImprovements add value only when they conform to neighborhood standards
Explanation
The principle of substitution is the foundation of the sales comparison approach: a rational buyer will not pay more for a property than the cost of acquiring a comparable substitute.
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Key Terms to Know
Comparable Sales (Comps)
Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
AppraisalA 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.
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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