What is the principle of substitution in real estate appraisal?

The principle of substitution in real estate appraisal states that a buyer will not pay more for a property than they would for an equally desirable substitute. This principle is fundamental in determining the market value of real estate. It is based on the idea that if two properties are considered substitutes—meaning they have similar utility, location, and characteristics—then the value of one property cannot exceed the value of the other.

This principle helps ensure that prices remain competitive within the market. For instance, if a buyer finds a property that meets their needs but is priced significantly higher than similar options, they are likely to choose one of the less expensive substitutes. Hence, the overall market value is influenced by the availability and pricing of similar properties.

In contrast, the other options do not accurately capture the essence of the principle. For example, while some may believe a buyer will pay more for unique properties, the principle specifically centers around the comparability of substitutes. Understanding this principle is crucial for appraisers as they assess property values based on market dynamics.