What key concept does the "principle of substitution" illustrate in property valuation?

The principle of substitution is fundamental in property valuation, as it asserts that a property's value is essentially determined by the cost to acquire a similar property. This concept implies that an informed buyer will not pay more for a property than the cost of purchasing a comparable substitute. Therefore, if two properties are considered equivalent in utility and desirability, the value of one property cannot exceed that of the other.

This principle highlights how market conditions and property characteristics influence value. For instance, if a buyer finds a similar property available for a lower price, they are unlikely to pay a premium for the first property, regardless of subjective factors. As a result, understanding this principle is critical in appraising properties accurately, as it reflects the competitive nature of the real estate market where substitutes play a key role in determining value.