In the broadest sense, replacement value in real estate is the total cost involved in replacing a piece of property with a similar piece. Depending on the property that must be replaced, the value may be less than, equal to, or even more than the purchase price of the property that must be replaced.

Buyers in today's market understand the concept of replacement value when making decisions to purchase property. This is primarily the reason why sales of raw land have fallen, and continue to be sluggish, when sales of existing and new homes are showing signs of improvement. After all, why would you buy a piece of dirt and build a home when in most cases you can buy a home for less than you could replace it for?

Sellers also need to pay attention to replacement value when listing their property for sale. If you own a piece of raw land, don't expect buyers to pay a premium for what you may perceive as a better piece of property than your neighbor. Bottom line is that price will be the determining factor if your property sells. If selling a home, make sure you look at what other comparison properties are listed for, including land. While your property may have a better view or fresh paint, don't expect a buyer to pay a higher premium for those qualities. Furthermore, buyers won't pay a higher price for a home if they could build it for cheaper on a comparable lot.

Replacement value will be one of the dominate factors controlling the market in 2010. And, with inventories still at all time highs, and distressed properties continuing to make their way into the market, it will be quite some time before replacement value is more than the purchase price of the property.