principle of substitution

[Wil in Norcal]

According to the principle of substitution, a buyer will not pay more for a property than an equally desirable property. Today I went in to a new home sales office and asked a salesperson " Why did this property recieve a large discount while this other property ( identical floor plan, very similar upgrades) did not? Also hy is it I can buy this same property (according to local MLS,) for 20k cheaper?" Salesperson response " Well if the buyer comes in and makes a stink about the price, we will lower it for them to match existing specs available, but if he doesn't......:icon_evil: we wont" The subject value and current sales price are very close, however if I know the buyer can buy it cheaper how can it be worth the higher value? (see principle of substitution) Does the principle of substitution translate to me finding the best deal for a buyer? With all the discounts/incentives going on with new homes in my area it is so difficult to really decipeher what is being paid for what?:Eyecrazy:

 

[mike kauffman]

Why buy a tv at best buy for 100$ bucks more when walmart carrys the same thing? Why do you care what the best deal for the buyer is,

 

[Couch Potato]

Will, its no different from buying a car; the ignorant pay more.

Read the definition of market value again. We appraise based on what knowledgeable buyers would do.

 

[hastalavista]

Does the principle of substitution translate to me finding the best deal for a buyer?

IMO-

The Principle of Substitution does not require you to find the best deal for the buyer.

But, the definition of market value that most of us use in our assignments assumes the typical buyer, acting in his/her best interest, and well informed, means the buyer will pay as low as she/he possibly can.

So, based on the definition of market value you are using, and applying the Principle of Substitution, given a range of values to choose from, your value opinion is most credible at that lowest price which best reflects what the typical buyer has paid for or can pay for (in the case of a listing) for the most similar substitute of the subject (all other things being equal).

The honest sales person you interviewed told you that if someone were to raise questions regarding their previously agreed-to contract price, the seller (builder) would lower that price to the now-being-offered price.
Sounds to me like the typical buyer, acting in their own best interest and being well informed, would most likely take the same model at the lower price than pay the higher price if given a choice. Sounds to me like the seller (builder) gives them that choice. Sounds to me like you need to consider that in your valuation analysis.

Good luck!

 

[Wil in Norcal]

Thanks Dennis.

With the increased amounts of incentives, discounts and creative sales programs, I would imagine it is becoming more and more difficult to be "a well informed buyer"

 

[hastalavista]

Thanks Dennis.

With the increased amounts of incentives, discounts and creative sales programs, I would imagine it is becoming more and more difficult to be "a well informed buyer"

Hard to say, but one thing for sure-
With all the builders trying to hide what is actually happening, its certainly becoming hard to be a well informed appraiser!:new_smile-l:

 

[moh malekpour]

Economically speaking, the principle of substitution mostly applies to the replacement cost of the property. The market value of property is mostly related to market approach and principle of H&BU and principle of supply and demand.

 

[Hal Mann]

Economically speaking, the principle of substitution mostly applies to the replacement cost of the property. The market value of property is mostly related to market approach and principle of H&BU and principle of supply and demand.

The principle of substitution is fundamental to the Sales Comparison Approach. It is simply incorrect to say that it is more applicable to the Cost Approach than the Sales Comparison Appraoch.

By the way, all three approaches are "market approaches".

 

[PL1957]

So, based on the definition of market value you are using, and applying the Principle of Substitution, given a range of values to choose from, your value opinion is most credible at that lowest price which best reflects what the typical buyer has paid for or can pay for (in the case of a listing) for the most similar substitute of the subject (all other things being equal).

Doesn't the typical definition of Market Value use "most probable" as the qualifier, not the highest or lowest?

 

[hastalavista]

Doesn't the typical definition of Market Value use "most probable" as the qualifier, not the highest or lowest?

Yes, but the "most probable" is the result of buyer and seller negotiating. In other words, just because I want to pay zero doesn't mean you'll accept that offer. So, the most probable price is not the price a typical buyer wants to pay (nothing), but somewhere between the lowest price the typical seller is likely to accept and the highest price the typical buyer is likely to offer. Speaking for myself, I can usually not determine what that precise point is, so I tend to end up with an adjusted range that gives me indicated values for the subject. From there, I'll try to narrow it down to what is the most "probable" within that range (sometimes, IMO, they may be all equally "probable").

There's no doubt, however, that as a buyer, acting in my own best interests, I'll pay as little as I can (which is as little as you, the seller, will accept, but certainly no more than I'm willing to offer).

In the posted scenario, the seller (builder) stated they'd lower the price if pressed. This was disclosed by the sales agent of the project. If a "typical" buyer comes into this knowledge, the "typical" reaction would be to ask for the lower price. Since the builder has acknowledged they do lower the price in such cases, it is probable that they will in this case.

I don't know if I explained myself well enough?