Property Valuation
The principle of substitution states that:
AA buyer will always pay more for a unique property
BA buyer will pay no more for a property than the cost of acquiring an equally desirable substitute✓ Correct
CProperties of equal value can be exchanged without tax consequences
DLand value cannot exceed the cost of improvements
Explanation
The principle of substitution is the foundation of all three appraisal approaches: a buyer will not pay more for a property than the cost of buying a comparable substitute, whether through purchase (sales comparison), construction (cost approach), or income (income 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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