What is the principle of substitution in valuation?

The principle of substitution in valuation is fundamentally based on the idea that a buyer would opt for a less expensive property rather than spending more on another property that offers comparable utility and desirability. This principle is key in assessing property values, as it asserts that the maximum value of a property is influenced by the cost of acquiring a similar property with similar characteristics and benefits. It reflects the market's behavior, indicating that demand and supply dynamics will encourage buyers to select options that provide equivalent satisfaction at a lower cost when available.

This principle underscores the importance of comparing properties within the same market and highlights how market forces can affect property prices. It also emphasizes the relevance of market trends and buyer preferences in the valuation process, making it a cornerstone concept in real estate appraisal and assessment practices.