Property Valuation
Which principle of value states that a property's maximum value is limited by the cost of acquiring an equally desirable substitute?
APrinciple of substitution✓ Correct
BPrinciple of contribution
CPrinciple of conformity
DPrinciple of anticipation
Explanation
The principle of substitution states that a prudent buyer will pay no more for a property than the cost of acquiring an equivalent substitute. It underlies all three appraisal approaches.
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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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