What appraisal principle states that the value of a property is determined by the cost of purchasing an equivalent substitute property?

The principle of substitution asserts that the value of a property is directly influenced by the cost of acquiring a similar property in the market. This principle is foundational in real estate appraisal and holds that if two properties are similar, the one with the lower price should be chosen by prospective buyers, thereby influencing the market value of the more expensive property downward.

In practical terms, when appraisers utilize this principle, they look for comparable properties, often referred to as "comps," that have sold recently. They analyze the sale prices of these properties to provide a basis for determining the value of the property in question. This approach helps ensure that property valuations reflect current market conditions and accurate buyer behavior.

By focusing on the value derived from potential substitutes, the principle of substitution reinforces the idea that market dynamics and buyer preferences play a crucial role in real estate valuation. This understanding is essential for brokers and agents when advising clients on pricing strategies and property investments.