What does the principle of 'substitution' assert in real estate?

The principle of 'substitution' in real estate posits that a property's value is determined by how much it would cost to acquire an equally desirable substitute property. In simpler terms, if a buyer can purchase a similar property at a lower price, they are unlikely to pay more for another property that does not provide additional unique value. This principle is grounded in the idea that buyers will seek to make economically sound decisions; thus, the value of a property is influenced by alternatives available in the market. When comparable properties exist, the market tends to drive prices toward equivalence based on this competition among similar options.

The other statements, while touching on real estate principles, do not accurately reflect the core essence of the substitution principle. For instance, while competitive updates may contribute to a property's attractiveness, they do not directly relate to how substitution affects valuation. Similarly, the differentiation between types of properties, like residential and commercial, or the context of investment versus personal use does not directly relate to the comparative evaluation of similar properties that the principle focuses on.