Real Estate Council of Alberta Fundamentals Practice Exam

Which principle refers to the expectation that a buyer will not pay excessively more for better property unless justified?

1. Principal of Surplus Productivity

2. Principal of Substitution

3. Principal of Progression

4. Principal of Competition

The correct answer is: Principal of Substitution

The principle that aligns with the expectation that a buyer will not pay excessively more for a better property unless justified is the principle of substitution. This principle asserts that a buyer will not pay more for a property than what they would have to pay to acquire a comparable alternative that offers similar utility or desirability. Under this principle, the market will dictate that properties serving similar functions and offering similar benefits should have similar prices. Therefore, if two properties are similar, a buyer would compare their options and likely choose the one that offers the best value for the price, ensuring they do not overpay for a property unless there are compelling reasons or significant advantages to justify the higher cost. In contrast, the other principles focus on different aspects of real estate valuation or dynamics. The principle of surplus productivity pertains to the potential net income generated from a property exceeding the costs of production, while the principle of progression deals with property values being positively influenced by the presence of higher-valued properties in the neighborhood. The principle of competition is about how an increase in supply or competition in the market can influence property prices and returns, often leading to a reduction in profitability when there are too many comparable properties. Each of these principles plays a distinct role in real estate economics, but for the scenario