Property Valuation
The principle of substitution states that:
AProperty values are determined by government assessment
BA buyer will not pay more for a property than the cost of acquiring an equally desirable substitute✓ Correct
CHighest and best use always equals current use
DProperty values always increase over time
Explanation
The principle of substitution is the foundation of all three appraisal approaches: a rational buyer won't pay more for a property than the cost of an equivalent substitute, whether built (cost approach), bought (sales comparison), or replacing 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.
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.
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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