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, or appraisal by summation, fundamentally relies on the principle of substitution, which posits that a buyer will not pay more for a property than the cost to replace it with a similar one of equal utility.
A) supply and demand.
Supply and demand refer to the economic principles that dictate market prices based on the availability of goods and the desire for them. While these concepts influence property values, they do not specifically underlie the cost approach, which focuses on the cost to replace a property rather than market fluctuations.
B) substitution.
Substitution is the correct principle behind the cost approach to value. This principle asserts that the value of a property is determined by the cost of acquiring a similar property with comparable utility, making it central to the cost approach methodology.
C) regression and progression.
Regression and progression are concepts related to the influence of surrounding properties on a subject property's value. Regression suggests that a higher-valued property can lose value due to nearby lower-valued properties, while progression indicates the opposite. These concepts do not directly apply to the cost approach, which is centered on replacement costs rather than comparative market values.
D) plottage.
Plottage refers to the increase in value that occurs when two or more adjacent parcels of land are combined into a single parcel. Although plottage can affect value, it is not the foundational principle of the cost approach, which strictly adheres to the substitution concept.
Conclusion
Substitution is the definitive principle underpinning the cost approach to value, as it emphasizes the relationship between the cost of replacing a property and its value. Other options, such as supply and demand, regression and progression, and plottage, may be relevant to property valuation but do not capture the essence of the cost approach as accurately as substitution does.