29 Pages Posted: 24 Mar 2008 Last revised: 20 Sep 2011
Date Written: November 30, 2008
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.
Keywords: Presale, Hedge Real Estate Risks, Housing, Heterogeneous Beliefs
JEL Classification: G12, G14, G21, H31
Suggested Citation: Suggested Citation
Liu, Peng and Edelstein, Robert H. and Wu, Fang, The Markets for Real Estate Presales: A Theoretical Approach (November 30, 2008). Journal of Real Estate Finance and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1108668