Substitution
National Real Estate Exam glossary · Valuation
Definition
The valuation principle that a knowledgeable buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. It is the master principle underlying all three approaches to value—sales comparison, cost, and income—because each, at bottom, measures a property against its alternatives.
Substitution in plain English
Substitution is the simple idea that a smart buyer won't pay more for something than it would cost to get an equally good replacement. If two nearly identical houses are for sale, nobody rationally pays $400,000 for one when the other, just as nice, is $350,000 — the cheaper twin sets the ceiling. It's the same reason you wouldn't buy the $8 water bottle when the identical one next to it is $3. This principle quietly drives every way appraisers estimate value, because each method really just compares a property against its available alternatives.
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