Real Estate Council of Alberta Fundamentals Practice Exam

What principle states that buyers will not pay more for a property than what it would cost to acquire a similar property?

1. Principal of Competition

2. Principal of Contribution

3. Principal of Substitution

4. Principal of Progression

The correct answer is: Principal of Substitution

The principle that states buyers will not pay more for a property than what it would cost to acquire a similar property is known as the principle of substitution. This principle is fundamental to property valuation, as it posits that the value of a property is influenced by the cost of acquiring a comparable substitute. In practice, if a buyer is considering a property, they will look at the available alternatives and evaluate how much similar properties are selling for. If a property is priced significantly higher than its comparable substitutes, buyers are likely to opt for those alternatives instead, as they represent better value for their investment. The principle of substitution underscores the importance of market conditions and competition among properties in determining their value. Understanding this principle helps buyers make informed decisions, ensuring they do not overpay relative to what other similar properties are available for in the market. The other principles mentioned serve different functions. For instance, the principle of competition relates to how an increase in the supply of comparable properties can affect their respective values, while the principle of contribution discusses how each component of a property should add value to the overall property. The principle of progression deals with how the value of a lesser property can be enhanced due to its proximity to more valuable properties. However, they do not directly encaps