Which principle states that a knowledgeable buyer will pay no more for a property than the cost of a comparable property?

• A. Law of substitution
• B. Principle of progression
• C. Principle of conformity
• D. Principle of substitution

Answer: (D)

The principle of substitution says a knowledgeable buyer won’t pay more for a property than the price of a comparable substitute available in the same market. If two properties offer the same utility—similar location, size, features—a buyer will opt for the cheaper one. So any price above the cost of a near-equivalent substitute is not sustainable, because buyers can and will choose the substitute instead. This is how market value is bounded: the value of a property is driven by what comparable properties cost, not by what an individual seller thinks it’s worth. For example, if a similar home in the neighborhood is priced lower, buyers will gravitate toward that option, and the higher-priced property would need to offer extra value to justify its premium. While you sometimes see the term law of substitution used interchangeably, the core idea remains the same: price is limited by the cost of a comparable substitute.