Which statement best describes the principle of substitution in real estate?

The principle of substitution in real estate asserts that the value of a property is influenced by the prices of comparable properties in the market. This concept is rooted in the idea that a rational buyer will not pay more for a property than what they would pay for an equally desirable substitute. When appraising a property, real estate professionals consider the sale prices of similar properties that have recently sold in the area, known as comparables or "comps." This approach helps to establish a value that reflects current market conditions and buyer expectations.

By analyzing comparable properties, real estate investors and appraisers can determine a fair market value that aligns with what buyers may be willing to pay, ensuring that the valuation reflects market realities. This principle is crucial in providing a baseline for evaluations, whether for investment purposes, refinancing, or sales decisions.

The other options do not accurately reflect this fundamental principle. For example, while historical price trends and income potential can contribute to a property's value, they are not the primary basis under the principle of substitution. Furthermore, the notion that value is fixed contradicts the dynamic nature of real estate where market conditions influence property prices over time.