What is meant by the term substitution in real estate?

The term substitution in real estate refers to the principle that a property’s value is determined by the cost to acquire a similar or equivalent property. This principle operates on the idea that if two properties are generally similar in terms of utility and desirability, the price of one property can be expected to reflect the market price of a comparable property. Essentially, if a buyer finds a similar property for a lower price, they will be less willing to pay more for the original property, thereby driving its value down.

This concept is fundamental in real estate appraisal and valuation, as it helps appraisers determine market value based on comparable sales. It emphasizes that consumers will not pay more for one property than they would for another of equal utility and quality, reinforcing the competitive nature of the real estate market.

The other choices may relate to aspects of real estate management, transactions, or improvements, but they do not accurately capture the economic principle of substitution as it applies to property valuation.