New York Real Estate Salesperson ExaminationValuation and Market AnalysisEasy
A buyer is considering two homes that are virtually identical in terms of size, features, and location. Home A is listed at $400,000, while Home B, which just came on the market, is listed at $380,000. According to the principle of substitution, what is the likely maximum value a prudent buyer would pay for Home A?
- A$360,000
- B$390,000
- C$380,000
- D$400,000
Show answer & explanationAnswer & explanation
Correct answer: C. $380,000
The principle of substitution states that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute property. Since Home B is an equally desirable substitute at $380,000, that is the maximum a buyer would likely pay for Home A.
Why the other options are wrong
- A. This value is too low, as the substitute is available at $380,000.
- B. This is an arbitrary value; the principle points to the cost of the substitute.
- D. A prudent buyer would not pay more if an identical, cheaper option exists.
Principle of Substitution
An appraisal principle stating that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute property.
- Forms the basis for the sales comparison approach.
- Applies to both buyers and sellers.
- Value is limited by the availability of comparable alternatives.
Memory trick: Value's Principles: CA(P) CON(T) SUB.