A California agent is explaining the principle of substitution to a first-time homebuyer. The buyer has found a home listed at $650,000 but notices a similar home two blocks away listed at $620,000. According to the principle of substitution, what should the buyer understand?
Correct Answer
B) A prudent buyer will not pay more for a property than the cost of acquiring an equally desirable substitute
The principle of substitution states that a prudent buyer will pay no more for a property than the cost of acquiring an equally desirable substitute property. If the $620,000 home is truly comparable in features, condition, and desirability, it establishes a benchmark that the $650,000 home may be overpriced. However, the buyer should consider all differences between the properties before concluding they are equally desirable substitutes.
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- → The appraisal approach that estimates value by comparing a property to similar recently sold properties is the:
- → The period of time a structure continues to earn sufficient income to continue operations is referred to as the structure’s:
- → An appraiser in California is using the cost approach for a property in Sacramento and must account for entrepreneurial profit (also called developer's profit). A local developer confirms that typical profit margins in the Sacramento market are 15-20% of total development costs. How should the appraiser handle entrepreneurial profit?
- → A California buyer's agent is reviewing comparable sales data and notices that the county recorder's office lists different documentary transfer tax amounts for similar properties in the same city. Some properties show both a county and city transfer tax, while others show only the county tax. What does this difference indicate about the sale verification process?
- → When conducting a sales comparison analysis in California, an appraiser discovers that the subject property has an Accessory Dwelling Unit (ADU) that was built under California's recent ADU legislation. How should the appraiser handle this feature?
- → A California real estate agent is selecting comparable sales for a CMA on a property in Fresno. The agent finds a sale from 14 months ago in the same neighborhood. Under standard California CMA practice, why might the agent hesitate to use this comparable?
- → A California real estate licensee is preparing a CMA and notices that one comparable property sold in a foreclosure auction conducted by a trustee under a deed of trust. How should this sale be handled in the CMA?
- → Compared to other appraisal factors, appraisers generally find the the most difficult calculation to measure precisely.
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