Real Estate Appraisal Practice Exam

What value principle states that an identical property sold recently should indicate the value of the subject property?

1. Cost Approach

2. Assessment

3. Substitution

4. Supply and Demand

The correct answer is: Substitution

The principle of substitution asserts that the value of a property is determined by the cost of acquiring an equally desirable substitute property, often emphasizing that no informed buyer would pay more for a property than the cost of an equivalent property. This principle is particularly relevant in real estate appraisal as it allows appraisers to consider recent sales of identical or similar properties as benchmarks for determining the value of the subject property. When a comparable property sells, it provides a direct indication of market value, making it a pivotal element in property appraisal evaluations. In contrast, the cost approach focuses on estimating the cost to replace or reproduce a property, which may not accurately reflect current market conditions. Assessment refers to the process of determining property value for taxation purposes, which can vary significantly from market value. The supply and demand principle deals with the market dynamics affecting property values based on the number of available properties versus the demand for them, yet it does not directly guide appraisers in determining value from recent sales of similar properties. Thus, the principle of substitution stands out as the correct rationale in this context.