What is the principle of substitution in property appraisal?

The principle of substitution is a foundational concept in property appraisal that asserts that a buyer will not pay more for a property than they would for an equally desirable substitute. This principle is based on the idea that if two properties are similar in nature, location, and utility, then the value of either property will be influenced by the price of the other. Essentially, if one property is priced significantly higher than a similar one, buyers are likely to choose the less expensive option, thereby limiting the potential price of the more expensive property.

This principle is crucial in establishing fair market value, as it highlights the competitive nature of property markets where alternatives strongly influence pricing decisions. Consequently, appraisers utilize this principle when comparing sales data, which helps ensure that valuations reflect the current market realities and expectations.

In contrast, while factors like location, renovation, and the depreciation of land value may affect specific appraisals, they do not directly define the principle of substitution. A focus solely on location, for instance, overlooks the comparison aspect that is central to substitution. Similarly, while renovations may enhance a property's value, this belief does not encapsulate the essence of substitution, which is about the buyer's willingness to pay relative to available alternatives. Lastly, the notion that land value consistently