Property Valuation
What is the principle of substitution as applied in real estate valuation?
AA property's value is set by anticipating future income
BA prudent buyer will pay no more than the cost of an equally desirable substitute✓ Correct
CValue increases when adjacent properties are improved
DGovernment regulations substitute for market controls
Explanation
The principle of substitution states that a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. This principle underpins the sales comparison and cost approaches to value.
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Key Terms to Know
Comparable Sales (Comps)
Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
AppraisalA 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.
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