Principle of Substitution
The principle that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. It is the economic foundation of all three approaches to value.
Substitution explains why the approaches work: in the sales comparison approach, the substitute is a similar recently sold home; in the cost approach, it is building an equivalent property; in the income approach, it is an investment producing equivalent returns. When a value conclusion drifts far from what substitutes cost, the analysis usually contains an error — substitution is the sanity check baked into appraisal theory.
Related Terms
Sales Comparison Approach
A valuation method that estimates a property's value by comparing it to similar properties that have recently sold in the same market area.
Cost Approach
A valuation method that estimates value by calculating the cost to reproduce or replace the improvements, subtracting accrued depreciation, and adding the land value.
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Market Value
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus..
More in Valuation Approaches
View allReconciliation
The process by which an appraiser evaluates and weighs the results from the different valuation approaches (sales comparison, cost, and income) to arrive at a final opinion of value..
Comparable Sale
A recently sold property that is similar to the subject property in terms of location, size, condition, and features, used as evidence to support the appraiser's opinion of value in the sales comparison approach..
Adjustment
A dollar or percentage modification applied to a comparable sale's price to account for differences between the comparable and the subject property.
Paired Sales Analysis
A technique used to estimate the value contribution of a specific property feature by comparing two sales that are identical except for that one feature.