Presale agreements have become a pervasive worldwide practice for residential sales, especially in many Asian markets. Although there is a burgeoning empirical literature on presales agreements, only a few papers actually address their theoretical foundations. We create a set of interrelated theoretical models for explaining how and why developers and buyers engage in presale contracts for non-completed residential dwellings. Given heterogeneous consumer beliefs about future market prices, developers and buyers enter into presale agreements to mitigate, two intertwined, fundamental risks: those of real estate market valuation and default. Our analyses are consistent with prior empirical findings and provide additional theoretical insights for understanding the market for presales.
The Journal of Real Estate Finance and Economics – Springer Journals
Published: May 6, 2011
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