Certified Residential Appraiser Practice Exam

In terms of value, what does the term 'substitution' imply?

1. Comparing costs to find the cheapest option

2. Replacing old property with new construction

3. Buying an alternative property instead of the original

4. The idea that a buyer will pay no more for a property than it would cost to purchase a similar one

The correct answer is: The idea that a buyer will pay no more for a property than it would cost to purchase a similar one

The term 'substitution' in the context of value refers specifically to the principle that a buyer will not pay more for a property than the cost of acquiring a comparable property. This concept is foundational in appraisal and real estate economics because it emphasizes the idea of equitability among similar properties. When properties are deemed comparable, factors like location, condition, and size come into play. If a buyer perceives two properties as equivalent in terms of features and benefits, the most they will be willing to pay for the subject property is determined by the cost of an alternative property that provides similar utility and enjoyment. The other options do not accurately capture the essence of the substitution principle. For instance, simply comparing costs to find the cheapest option does not take into account the full range of comparable features that also affect value. The idea of replacing old property with new construction focuses on a specific scenario rather than the broader economic principle that underpins substitution. Lastly, buying an alternative property instead of the original speaks to decision-making in the market but lacks the foundational valuation concept of limiting payment to the cost of a similar alternative.