A principle of substitution states that a buyer will pay no more for a property than the cost of an equally desirable (and comparable) alternative property.
Principles of substitution can be used when looking to purchase a home or rent a home. This principle is similar to a market comparable (often used when determining how much to list a home for), but only involves properties that are on the market and available.
If a buyer can purchase a 2001 4BR/2BA house with a pool near downtown Tampa, Florida for $500,000, why would they pay $600,000 for a house in the same neighborhood that is of the same specs?
Or, why would a renter pay $1100/month for a 2BR/2BA property when they could lease a similar property right down the street for $900/month?
It is for this reason that it is imperative for both landlords and tenants, and buyers and sellers, to consider principles of substitution. Buyers and tenants certainly don’t want to overpay, and landlords and sellers don’t want to underestimate or worse, overestimate, and lose countless opportunities.
