What does the Principle of Substitution state about property value?

The Principle of Substitution is a foundational concept in real estate appraisal that asserts that an informed buyer will not pay more for a property than the cost of acquiring a similar, equally desirable property. This means that if a property is priced significantly higher than comparable properties in the same area, buyers are likely to seek alternatives that offer similar value at a lower price. This principle is crucial for maintaining market equilibrium, as it helps to ensure that property values reflect competitive conditions.

Understanding this principle assists investors and appraisers in determining fair market value based on the availability of similar properties. They consider factors such as location, size, amenities, and overall appeal when comparing properties. The essence of the Principle of Substitution promotes the idea that competition among similar properties will prevent any property from being sold for excessively high prices compared to its alternatives. This underlines the importance of comparability in real estate valuation practices.