Property Valuation
The principle of substitution in appraisal states that:
AA property's value is determined by its location
BA buyer will not pay more for a property than the cost of acquiring a comparable substitute✓ Correct
CProperties increase in value as the market improves
DValue is created by future expectations of income
Explanation
The principle of substitution underlies all three appraisal approaches: a rational buyer will not pay more for a property than the cost of acquiring a substitute of equal desirability and utility. It sets the upper limit of value.
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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.
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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