Certified Residential Appraiser Practice Exam

What principle suggests that a property’s value is determined by what a buyer is willing to pay for a comparable property?

1. Cost Principle

2. Substitution Principle

3. Income Approach

4. Market Comparison

The correct answer is: Substitution Principle

The Substitution Principle is foundational in property appraisal and states that a property's value can be determined by what a buyer is willing to pay for a comparable property. This principle operates on the idea that if a property is similar to another that is available for sale, and one can be purchased for a lower price, buyers will opt for the more affordable option. Thus, the value of a property is generally influenced by the price of similar properties in the market. This principle is critical for appraisers as it provides a clear, market-based approach to determining property values. When appraisers assess a property, they look for comparable sales (also known as comps) to understand the current market dynamics and set a competitive price reflective of the market's willingness to pay for similar properties. By focusing on comparables, the Substitution Principle ensures that appraisals remain relevant and accurately reflect the value present in the market, as opposed to relying solely on the cost to replace the property or the income it generates.