California Real Estate SalespersonProperty Valuation and Financial AnalysisEasy
A buyer is choosing between two nearly identical new homes in the same subdivision, both with the same square footage, lot size, and finishes. Home A is listed at $350,000 and Home B, with equal utility and desirability, is listed at $340,000. According to appraisal theory, a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. Which appraisal principle does this describe?
- APrinciple of Substitution
- BPrinciple of Contribution
- CPrinciple of Anticipation
- DPrinciple of Conformity
Show answer & explanationAnswer & explanation
Correct answer: A. Principle of Substitution
The principle of substitution holds that the value of a property is influenced by the cost of acquiring an equally desirable and useful substitute, assuming no undue delay. This is the foundation for the sales comparison approach.
Why the other options are wrong
- B. Contribution measures how much a specific improvement adds to value.
- C. Anticipation relates to value being based on expected future benefits.
- D. Conformity relates to similarity of land use within a neighborhood, not substitute pricing.
Principle of Substitution
A buyer will not pay more for a property than the cost of acquiring an equally desirable substitute property.
- Basis for the sales comparison approach
- Assumes substitute is available without unreasonable delay
- Sets the upper limit of value
Memory trick: Why pay more when an equal twin costs less?