Property Valuation
The principle of substitution states that:
AA higher-priced property will always attract more buyers
BA buyer will not pay more for a property than the cost of acquiring an equally desirable substitute✓ Correct
COlder properties are always worth less than newer ones
DValue is determined solely by what the seller paid for the property
Explanation
The principle of substitution underlies all three approaches to value. Buyers will not pay more for a property when a comparable substitute is available at a lower price.
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Key Terms to Know
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.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Deed of TrustA security instrument used in many states instead of a mortgage, involving three parties: borrower (trustor), lender (beneficiary), and a neutral trustee.
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