Property ValuationIntermediateNorth Carolina Exam

The principle of 'substitution' in real estate appraisal states that:

AA buyer will pay more for a unique property

BA buyer will pay no more for a property than the cost to acquire an equally desirable substituteCorrect

CAll properties in a neighborhood should sell for the same price, as is typical in most transactions

DValue is determined by future benefits

Why A buyer will pay no more for a property than the cost to acquire an equally desirable substitute Is Correct

Answer B: A buyer will pay no more for a property than the cost to acquire an equally desirable substitute

The principle of substitution holds that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable and comparable substitute.

Exam Tip: Property Valuation

Valuation questions focus on the three approaches to value: sales comparison, cost, and income. Know which approach is best for which property type. The income approach uses cap rate and NOI — memorize these formulas.

Key Property Valuation Terms in This Question

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

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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.

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.

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