108. The cost approach to value, or appraisal by summation, is based on the principle of
Answer: B
The cost approach to value is based on the principle of substitution.
The cost approach to value, also known as appraisal by summation, is fundamentally grounded in the principle of substitution. This principle suggests that a property's value is determined by the cost to replace it with a similar one, assuming no greater value is derived from the property than the cost of constructing an equivalent.
A) supply and demand.
Supply and demand refer to the market dynamics that influence property values based on their availability and buyer interest. While these factors are essential in determining market value, they do not directly relate to the cost approach, which specifically emphasizes replacement cost rather than market fluctuations.
B) substitution.
Substitution is the correct principle underlying the cost approach. It asserts that a buyer would not pay more for a property than the cost to acquire an equally desirable substitute. This concept is critical in appraising properties, as it focuses on the cost of replacement as the determining factor of value.
C) regression and progression.
Regression and progression are concepts related to the influence of surrounding properties on a subject property's value. While they can affect market value, they are not foundational to the cost approach, which prioritizes the cost to replace over relative property values influenced by external factors.
D) plottage.
Plottage refers to the increase in value that can occur when two or more adjacent properties are combined into a single parcel. While it may affect property value, it does not pertain to the cost approach's reliance on the principle of substitution for determining value.
Conclusion
The cost approach is definitively based on the principle of substitution, as it evaluates value through the lens of replacement cost. All other options, including supply and demand, regression and progression, and plottage, address different aspects of property valuation and do not align with the cost approach's core principle.