Property Valuation
The 'principle of substitution' underlying appraisal theory states that:
AA newer property is always worth more than an older one
BA buyer will pay no more for a property than the cost of acquiring an equally desirable substitute✓ Correct
CSupply and demand determine value in all markets equally
DHighest and best use always equals the current use
Explanation
The principle of substitution holds that a rational buyer will pay no more for a property than the price of acquiring an equally desirable substitute. This principle underlies all three appraisal approaches — sales comparison, cost, and income.
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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.
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.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
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