The Markets for Real Estate Presales: A Theoretical Approach

29 Pages Posted: 24 Mar 2008 Last revised: 20 Sep 2011

Peng Liu

Cornell University

Robert H. Edelstein

University of California, Berkeley - Fisher Center for Real Estate and Urban Economics

Fang Wu

Citadel LLC

Date Written: November 30, 2008

Abstract

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

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

Peng Liu (Contact Author)

Cornell University ( email )

465B Statler Hall
Ithaca, NY 14853
United States
6072542960 (Phone)

HOME PAGE: http://www.professorliu.net

Robert H. Edelstein

University of California, Berkeley - Fisher Center for Real Estate and Urban Economics ( email )

Haas School of Business
Berkeley, CA 94720-1900
United States
510-643-6105 (Phone)
510-643-7357 (Fax)

Fang Wu

Citadel LLC ( email )

131 S Dearborn Street
Chicago, IL 60603
United States

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