California Real Estate Practice Exam

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Which principle states that the value of a property is determined by the cost to purchase a property of similar usefulness?

  1. Principle of substitution

  2. Principle of highest and best use

  3. Principle of demand

  4. Principle of competition

The correct answer is: Principle of substitution

The Principle of Substitution states that the value of a property is determined by the cost to purchase a similar property that serves the same purpose. This principle assumes that a rational buyer would not pay more for a property when there is a similar property available at a lower cost. Therefore, this principle helps to guide sellers in setting an appropriate price for their property and buyers in assessing the value of a property. The other options, Principle of highest and best use, Principle of demand, and Principle of competition, do not address the concept of substitution and are not directly related to determining the value of a property.

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