Question: What is the definition of substitution in real estate?

What does substitution in real estate mean?

The principle of substitution states that the upper limit of value tends to be set by the cost of acquiring an equally desirable substitute, assuming no untimely delays. A prudent investor would pay no more for an income-producing property than it would cost to build or purchase a similar property.

What is an example of substitution in real estate?

A two-bedroom home in one neighborhood may be thousands more than a similar two-bedroom home in a neighborhood just a mile away. Patrick is getting frustrated because he doesn’t understand why the prices would be so different when the houses are so similar. This is where the principle of substitution comes in.

Which appraisal approach uses the principles of substitution and contribution?

Broker’s comparative market analysis

It is based on the principle of substitution– that a buyer will pay no more for the subject property than would be sufficient to purchase a comparable property– and contribution– that specific characteristics add value to a property.

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Which appraisal approach depends on the substitution principle?

Like the cost approach, the sales comparison approach is based on the principle of substitution. This principle presumes that a prudent buyer will pay no more for a property than the purchase price of a similar and equally desirable property.

What is highest and best use in real estate?

Highest and Best Use, Defined

The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible and that results in the highest value.

What is similar cost principle in real estate?

This principle says that the maximum value of a property usually is established by the cost of acquiring an equivalent substitute property that has the same use, design, and income.

What is a Plottage value in real estate?

Plottage is the increase in value realized by combining adjacent parcels of land into one larger parcel. … Generally, the value of the whole parcel will be greater than the sum of the individual smaller parcels.

What does regression mean in real estate?

The principle of regression is a term used by real estate appraisers stating that the value of high-end real estate may be diminished by having lower-end properties in the same vicinity. This principle is used frequently in writing zoning laws, which strive to keep business and residential areas separate.

What is the meaning of principle of substitution?

Definition: an economic law of value; no prudent buyer will pay more for a property than the cost of an equally desirable replacement property.

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Which of the following is an example of economic obsolescence?

Different types, examples, and manifestations are listed below. Some examples of economic obsolescence are new government mandates, changes in zoning laws, rising crime rates, even the construction of a national highway or an airport could make the area less desirable.

How does the principle of substitution benefit a buyer?

A principle of substitution states that a buyer will pay no more for a property than the cost of an equally desirable (and comparable) alternative property. Principles of substitution can be used when looking to purchase a home or rent a home.