How does the cost of producing an identical property relate to the principle of substitution?

The principle of substitution in real estate asserts that a buyer will not pay more for a property than the cost of producing an equivalent property. Therefore, the cost of producing an identical property establishes a threshold or maximum price in the marketplace. If a similar property can be built or purchased for a certain cost, that cost serves as a benchmark for what buyers would be willing to pay for an existing property with similar attributes. This idea is foundational in the valuation of properties, as it helps ensure that market prices reflect the realities of construction and replacement costs.

While the other options may touch on aspects of real estate valuation, they do not align directly with the principle of substitution in the same way. For instance, determining minimum investment needs or assessing renovation costs refers to different aspects of property valuation. Therefore, understanding how the cost of production links to market price is essential for grasping the principle of substitution and its role in property valuation.