Property Valuation
The appraisal principle of 'substitution' holds that:
AOne appraiser may substitute their judgment for another's
BA buyer will not pay more for a property than the cost of acquiring an equally desirable substitute✓ Correct
CAll comparable sales must be located in the same school district
DA seller can substitute a new property for the one under contract
Explanation
The principle of substitution is the foundation of all three appraisal approaches: a rational buyer will not pay more for a property than the price of an equivalent substitute. It drives the selection of comparable sales, replacement cost analysis, and income comparisons.
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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.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
Option ContractA contract giving the buyer the right, but not the obligation, to purchase a property at a specified price within a specified time period.
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