What principle suggests that a buyer would only pay a fair price based on available substitute options?

The principle that suggests a buyer would only pay a fair price based on available substitute options is the Principle of Substitution. This principle asserts that the maximum value of a property is determined by the cost of acquiring an equally desirable substitute property. In essence, if there are alternatives that provide similar utility and satisfaction to a buyer, they are unlikely to pay more for one property than they would for another similar property.

This concept emphasizes the influence of market competition and availability on property pricing. If a buyer perceives that they can attain similar benefits from a comparable property at a lower cost, they will not pay a premium for the more expensive option. Therefore, the essential idea is that the value of a property is inherently tied to the prices of comparable properties in the market, reinforcing the role of viable substitutes in price determination.

Understanding this principle is crucial for property appraisers, buyers, and sellers as it underpins real estate market behavior, guiding pricing strategies and negotiations.