The 'principle of substitution' underpins which appraisal approach?
Why All three appraisal approaches Is Correct
Answer D: All three appraisal approaches
The principle of substitution — that a buyer will pay no more for a property than the cost of acquiring an equally desirable substitute — underpins all three appraisal approaches: sales comparison (comparable sales), cost (cost to build equivalent), and income (alternative investments).
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
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Key Terms to Know
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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