Property Valuation
What is the 'principle of substitution' in Rhode Island real estate valuation?
AThe principle that a seller can substitute one property for another
BThe principle that a buyer will not pay more for a property than the cost of an equally desirable substitute✓ Correct
CThe principle that one appraisal method can always substitute for another
DThe principle that improvements substitute for land value
Explanation
The principle of substitution is foundational to appraisal: a rational buyer will not pay more for a property than the cost or price of an equally desirable substitute. It underlies both the sales comparison approach and the cost approach.
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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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