The Principle of Substitution
This principle is used to verify the Comparable Sales Approach results and the Cost approach. The principle of Substitution is used after a tentative value for a subject property has been determined. If other properties with similar features could be purchased for less than the subject property, weight is given to the Substitution method as well as it is reasonable to assume that no willing and able buyer would pay more for a home, all things being equal, than what similar properties in the surrounding neighborhood are selling for.
It's important to note that while a quantitative approach is used to estimate value, beauty is always in the eyes of the beholder and at times buyers will pay more for a home because they are drawn to it, or even exhausted at the process and would rather get into a house than continue looking further. Sometimes a buyer will pay more for a home than what it would appear to be worth to the average person. In a competitive bidding situation, these are usually the winning bidders.
The information contained in this post is educational and intended for informational purposes only. It does not constitute legal or real estate advice, nor does it substitute for real estate or legal advice.
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