Certified Pennsylvania Evaluator Practice Exam

In property appraisal, what does the Principle of Substitution state?

1. A property is valued based on what a buyer is willing to pay

2. Similar properties should sell for the same price

3. A property should not be valued higher than a comparable property

4. Market trends dictate property value adjustments

The correct answer is: A property should not be valued higher than a comparable property

The Principle of Substitution asserts that a property's value is determined by the cost to acquire a similar or comparable property in the same market. This means that a property should not be valued higher than a property that offers similar utility or features. If a buyer can find a comparable property at a lower price, they are less likely to pay more for the subject property, as they would opt for the less expensive option. This principle is fundamental in ensuring that appraisals remain grounded in realistic market conditions and comparable sales. In the context of appraisal, recognizing the Principle of Substitution helps appraisers maintain objectivity in their assessments and provides a basis for determining fair market value by referencing similar properties that have been sold.