What does the principle of substitution state?

The principle of substitution is a fundamental concept in real estate appraisal that asserts a buyer will not pay more for a property than the cost of acquiring an equally desirable substitute property. This principle reflects the economic concept of competitive pricing and suggests that if one property is priced higher than a comparable property, buyers will likely opt for the less expensive option. This behavior is based on the assumption that there are other similar properties on the market, which keeps prices in check.

Understanding this principle is crucial for appraisers when determining the value of a property, as it ensures that property valuations remain consistent with market dynamics. It’s essential for appraisers to consider comparable properties in the market when conducting their analysis to ensure that their valuations align with what buyers are willing to pay based on available alternatives.

The other options, while related to appraisal concepts, do not accurately encapsulate the principle of substitution. Market analysis and factors like room size versus room number involve nuances of appraisal methods or perceptions but do not directly address the core idea of a buyer's price sensitivity to substitution within the marketplace as highlighted in the correct choice.