Which statement best describes the substitution principle?

Which statement best describes the substitution principle?

• A. Substitution refers to the cost of the property determines value.
• B. Substitution is about replacing a property with a similar one if price is right.
• C. Substitution relates to depreciation.
• D. The value of a property is influenced by prices of similar substitutes.

Answer: (D)

The substitution principle says that a property's value is driven by the prices of similar substitute properties in the market. Buyers compare comparable homes and won’t pay more for a subject property than the cost of obtaining a similar substitute with similar features and location. So the value is influenced by how much these substitutes cost, which is why this statement best describes the concept. This differs from thinking value is set by the cost of the property itself, or that substitution is simply about replacing a property if the price is right. It also isn’t about depreciation, which relates to loss in value over time due to wear or aging.

The substitution principle says that a property's value is driven by the prices of similar substitute properties in the market. Buyers compare comparable homes and won’t pay more for a subject property than the cost of obtaining a similar substitute with similar features and location. So the value is influenced by how much these substitutes cost, which is why this statement best describes the concept.

This differs from thinking value is set by the cost of the property itself, or that substitution is simply about replacing a property if the price is right. It also isn’t about depreciation, which relates to loss in value over time due to wear or aging.