How does the principle of substitution assist appraisers?

The principle of substitution serves as a foundational concept in real estate appraisal, whereby an appraiser determines the value of a property based on the cost of acquiring an equivalent substitute property. This principle asserts that a rational buyer will not pay more for a property than they would for a similar one of equal utility. By using this principle, appraisers can establish a baseline for property evaluations by comparing similar properties—often termed "comps"—to gauge market value.

This baseline is crucial because it reflects the maximum price a buyer would be willing to pay, ensuring that appraisals remain grounded in market realities. It helps ensure that valuations take into account the characteristics and conditions of the subject property relative to comparable properties, thus enhancing accuracy in the appraisal process.