Principle of Substitution

The Principle of Substitution is the basis for the market data approach to appraisal.

This principle says that the maximum value of a property usually is established by the cost of acquiring an equivalent substitute property that has the same use, design, and income. As an easy example, why would anyone pay $1,000,000 for a house when they could purchase a different but equally desirable house in the same area for only $750,000? Same as when you go buy shoes—why would you pay more for one pair if there was cheaper pair with a similar look, feel, and design one store over?

One of the major factors for this to be effective is that there must be other properties in the area that could be substituted for the subject property and that have recently sold.