Texas Real Estate State Practice Exam

The principle of substitution in real estate appraisal refers to:

1. Combining several parcels of land into one

2. Depreciation of equal annual installment amounts

3. Estimating value using multiple approaches

4. Pledging real property for a promissory note

The correct answer is: Estimating value using multiple approaches

The principle of substitution in real estate appraisal indicates that a property's value is determined by the cost to acquire a similar substitute property, typically under similar circumstances. This principle suggests that a buyer will not pay more for a property than the cost of a comparable alternative. Thus, if multiple approaches to valuation (such as the cost approach, income approach, and sales comparison approach) provide similar results, it reinforces the idea that the property value is grounded in what someone would be willing to pay for an equivalent property. This principle is fundamental in ensuring that appraisers consider different methods to arrive at a property's fair market value, providing a solid foundation for real estate valuation that reflects market behavior. The correct choice captures the essence of this principle by emphasizing the importance of using various valuation methods to ensure accuracy and fairness in determining property value.