Which appraisal approach is based on the idea that an informed buyer will not pay more for a property than what it costs to acquire a similar property?

The appraisal approach that is based on the principle that an informed buyer will not pay more for a property than what it costs to acquire a similar property is known as the Direct Comparison approach. This method involves evaluating the prices of recently sold properties that are comparable to the subject property in terms of location, size, condition, and other relevant features. By analyzing these comparable sales, appraisers can determine a fair market value for the property, aligning the price with what buyers have recently paid for similar homes.

The rationale behind this method hinges on the concept of market competition; when buyers are knowledgeable about market conditions and the prices of similar properties, they will naturally gravitate towards what they believe is fair value. An increase in price for the subject property beyond the cost of similar properties is unlikely, as buyers will opt for alternatives.

This approach provides a clear, market-driven estimate grounded in real transactions, which is essential for establishing an accurate property valuation. It's a widely used method in residential appraisals because it reflects current market conditions effectively.