Abstract
The mathematical complexity of options makes the valuation and use of these instruments intimidating for most individuals. While real estate appraisers may initially share this response, appraisers' experience estimating replacement costs gives them a significant advantage in understanding the valuation of these securities. In this article the valuation of an option to buy land is demonstrated using a method based on the principle of substitution. The examples show how the value of the option to buy may be deduced by creating an alternative portfolio that provides an identical expected payoff. In light of the increasing recognition of options in the practice of real estate, this article should be of interest to real estate appraisers and other professionals.