What is the underlying principle for the three approaches to appraisal?

The principle of substitution is foundational to the three approaches to appraisal—cost, sales comparison, and income. This concept posits that a rational buyer will not pay more for a property than what it would cost to acquire an equally desirable substitute. Essentially, this principle underscores the relationship between various properties and their value; if a similar property is available at a lower price, a buyer will likely opt for that alternative.

In the cost approach, the cost to replace or reproduce the property is considered, informed by the idea that no informed buyer would pay more for a property than it would cost to build an equivalent one. In the sales comparison approach, recent sales of comparable properties serve as a basis for determining value, relying on the premise that similar assets should command similar prices. The income approach evaluates the value based on expected future income, presenting an alternative property that could yield similar returns.

The other principles—anticipation, market equilibrium, and cost-benefit analysis—play roles in specific contexts within the appraisal process but do not serve as the fundamental underpinning for all appraisal methods in the same way that substitution does. Anticipation relates to the expectation of future benefits that a property might provide, market equilibrium deals with the balance of supply and demand, and