Which economic principle most directly explains using competitive substitutes as evidence in sales comparison?
Correct Answer
D) Substitution among alternatives of comparable utility
Substitution concerns the price of obtaining an alternative offering comparable utility under relevant market and acquisition conditions. It helps explain why competitive sales inform value. Contribution, anticipation and conformity may also matter across valuation analyses; they are not confined exclusively to cost, income or another single approach.
Why This Is the Correct Answer
Option D is correct because the sales comparison approach is based on the principle of substitution. Market value tends to approximate the prices of competitive substitutes offering comparable utility, so their sales serve as value indicators.
Why the Other Options Are Wrong
Option A: Conformity as a requirement that all houses be identical
Option A describes conformity as a requirement that all houses be identical. Conformity concerns how reasonable compatibility with surroundings supports value; it does not require identical houses and is not the basis for using substitutes.
Option B: Anticipation as a requirement to ignore competing sale prices
Option B describes anticipation as a requirement to ignore competing sale prices. Anticipation concerns expected future benefits and does not call for ignoring competing sales.
Option C: Contribution, read as a rule that installed cost equals value
Option C reads contribution as a rule that installed cost equals value. Contribution measures a component's effect on value, which may differ from its cost, and it is not the principle that explains using competitive substitutes.
Swap it out: substitution
If a buyer could swap the subject for a similar house down the street, the prices of those swaps show what the subject is worth.
How to use: Use this to tie the sales comparison approach to its core principle.
Exam Tip
When a question links comparable sales to an economic principle, substitution is the direct connection.
Common Mistakes to Avoid
- -Linking sales comparison mainly to conformity
- -Treating contribution as cost equals value
- -Assuming each principle applies to only one approach
Concept Deep Dive
Analysis
This question tests which economic principle underlies the sales comparison approach. The approach presumes buyers will pay no more than the cost of an equally useful alternative. That idea is the principle of substitution.
Background Knowledge
The principle of substitution holds that a knowledgeable buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. In sales comparison, this justifies using sale prices of competing properties with similar utility as indicators of value. Other principles, such as contribution, also play roles across valuation analyses.
Real-World Application
A buyer comparing three similar homes in the same subdivision is unlikely to pay much more for one than the others offer. The appraiser relies on that behavior by using sales of those competitive homes to estimate the subject's value.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam