Mortgage Loan Originator (MLO) Licensing Practice Test 2025 - Free MLO Practice Questions and Study Guide

The Principle of Substitution is a fundamental concept in real estate appraisal that states a buyer will not pay more for a property than what it would cost to acquire a similar property with comparable utility. This principle relies on the idea that if two properties are considered to be essentially the same in terms of features and benefits, a buyer will choose to pay the lesser price. The underlying rationale is that market dynamics prevent irrational pricing; therefore, a knowledgeable buyer will weigh the options available to them, identifying that paying significantly more for a property when a similar one exists at a lower price does not provide any additional value. This principle helps maintain fair market values and also guides appraisers in determining property values based on what the market supports.

Other options do not accurately reflect this principle. The notion that a buyer will pay more for a unique property is contrary to the Principle of Substitution, as it emphasizes comparability rather than uniqueness. Additionally, stating that all properties are valued the same disregards the variances in features and conditions that might justify differences in value. As for the idea that property value is subjective, the principle actually aims to create a more objective assessment based on comparable data, rather than individual opinions.