Which economic principle suggests that a property's value is based on the cost to purchase a similar property?

The principle of substitution is integral to real estate valuation and holds that a property's value is influenced by the cost to acquire a similar property with comparable utility. This principle operates on the logic that a prudent buyer will not pay more for a property than it would cost to purchase an equally desirable substitute, assuming both properties serve the same purpose and are available under similar conditions.

In practice, if a potential buyer contemplates purchasing a property, they will often evaluate alternative properties in the market. If one property is priced significantly higher than comparable properties without notable advantages, it will likely remain unsold, as buyers will gravitate towards the more reasonably priced options that offer similar features, locations, and benefits.

By adhering to this principle, appraisers can establish value based on comparable sales data, ensuring that the valuation reflects current market conditions and buyer expectations. This approach is essential for developing an accurate estimation of a property's worth, guiding both buyers and sellers in their decisions.