Humber/Ontario Real Estate Course 4 Exam Practice

When a buyer uses an appraisal to establish the value of a house they are purchasing, which principle of value are they primarily relying upon?

1. Anticipation

2. Substitution

3. Supply and demand

4. Utility

The correct answer is: Substitution

The principle of substitution is the correct concept in this context because it refers to the idea that a buyer will not pay more for a property than what they would pay for a comparable property that serves the same purpose. When using an appraisal to establish the value of a house, buyers are essentially assessing what similar homes in the area are worth and determining that the subject property should be valued similarly. This reflects the core idea behind the principle of substitution, which states that if two properties are identical in all essential aspects, the value of one property can substitute for the value of the other. Other principles like anticipation relate more to the future benefits of ownership affecting value, while supply and demand consider broader market forces impacting pricing in general but don't apply specifically to an individual appraisal scenario. Utility pertains to the usefulness of the property to the owner or user but does not directly inform the method of establishing value. Thus, the most relevant principle at play with an appraisal in this purchasing context is indeed substitution.