Which principle states a rational buyer will pay no more for a property than the cost of a reasonably similar alternative?

The principle that states a rational buyer will pay no more for a property than the cost of a reasonably similar alternative is known as the Principle of Substitution. This principle is fundamental in real estate valuation and suggests that the value of a property is influenced by the cost to acquire an equivalent substitute.

When buyers are evaluating their options in the market, they tend to compare available properties and will not be willing to pay more for a property than what it would cost to acquire another that offers similar utility and characteristics. This concept drives market behavior, ensuring that prices are relatively stable as long as alternatives exist at comparable prices.

For instance, if a buyer finds two similar homes in the same neighborhood, and one is priced significantly higher than the other, the buyer is unlikely to purchase the more expensive option if the cheaper alternative provides the same level of satisfaction or utility.

In contrast, economic obsolescence pertains to the loss of value due to external factors affecting the property, value in exchange focuses on the price a property can fetch in the market, and the value-in-use concept relates to the value derived from a property based on its practical use to the owner rather than its market value.