What principle suggests that the maximum value of a property is influenced by the cost of purchasing a substitute property?

The principle illustrating that the maximum value of a property is influenced by the cost of purchasing a substitute property is known as the Principle of Substitution. This concept is fundamental in real estate appraisal and indicates that a buyer will not pay more for a property than the cost of acquiring a comparable property that provides similar utility.

In essence, if a similar property can be purchased at a lower price, the subject property's value is capped at that lower amount, as buyers will gravitate toward the more economically viable option. This principle underscores the competitive nature of the real estate market and highlights how substitute goods or properties can set value ceilings, thereby directly impacting property valuation.

Understanding the Principle of Substitution is crucial for appraisers as it guides their assessment of a property's market value, ensuring that evaluations remain aligned with market dynamics and buyer behavior.