What approach to property value estimates is based on the principle of substitution?

The correct answer is the Cost Approach, which relies on the principle of substitution. This principle asserts that a property’s value should be equivalent to the cost of acquiring an equally desirable substitute property, assuming no significant differences in utility or functionality.

In the context of the Cost Approach, appraisers estimate the current cost to construct an equivalent building, then adjust for any depreciation and add the value of the land. This method is particularly useful for properties that are unique or don’t frequently sell, as it allows appraisers to determine value based on the cost to reproduce or replace the asset without relying on sales of comparable properties.

The Sales Comparison and Income Approaches do not derive their value estimates directly from the principle of substitution in the same manner as the Cost Approach. The Sales Comparison Approach focuses on analyzing the sale prices of similar properties (comparables) to provide an estimate of value. The Income Approach, commonly used for investment properties, bases value on the income the property generates and the capitalization of that income, rather than the substitution principle. Lastly, while the Market Approach may sound similar to the Sales Comparison Approach, it is more broad and encompasses various methods of determining value based on market conditions rather than strictly adhering to substitution.