Property Valuation
The principle of substitution in Rhode Island appraisal holds that:
AA property's value is determined by what the government says it is worth
BA buyer will pay no more for a property than the cost of acquiring an equally desirable substitute✓ Correct
CProperties in the same neighborhood must have the same value
DOlder properties always have lower values than newer ones
Explanation
The principle of substitution states that the maximum value of a property is set by the cost of acquiring an equally desirable and functional substitute property. It underpins the sales comparison and cost 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.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
DepreciationA reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
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