What does the principle of substitution state?

The principle of substitution is a fundamental concept in real estate appraisal that asserts a buyer will not pay more for a property than the cost of acquiring an equivalent substitute property. This principle is rooted in the idea of competition and market behavior; if a property is priced significantly higher than alternatives that provide similar utility and benefits, savvy buyers will opt for those substitutes instead.

In practical terms, this principle helps appraisers assess a property’s value by examining the prices of comparable properties in the same area. If a similar property sells for less, it indicates that the subject property is overvalued unless specific unique features justify the higher price. Thus, the principle of substitution serves as a guiding mechanism for establishing market value and ensuring fairness in pricing.

Contextually, the other options do not align with this principle. Buyers are not typically willing to pay any price for a property, as there are always constraints based on available alternatives. Properties do not derive value solely from their historical prices; rather, current market conditions play a significant role in determining value. Additionally, while location is a crucial factor in real estate valuation, it does not exclusively determine a property's worth—factors such as condition, size, and market demand also significantly influence value.