Presales, Financing Constraints and Developers?Production Decisions
AbstractThis study explores the impacts a presale contract has on a developer’s pricing and production decisions in a game-theoretical framework. In an environment where developers have full capital market access, we find that both developers and buyers are indifferent between a presale and a spot sale method. This is true because a developer will adjust the presale price to compensate for the option value he gives to the buyer. However, in an environment with financing constraints, both developers and buyers are better off when a presale method is used. This is the case because the presale method solves the financing constraint by injecting equity into the development and, hence, reducing financing costs. The latter benefit can then be shared by both developers and buyers. Also, the additional equity the developers receive makes it more feasible for them to increase the size of their developments. This model prediction seems to describe well the real world situations seen in some of the property markets in Asia with nascent financial systems.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by American Real Estate Society in its journal journal of Real Estate Research.
Volume (Year): 30 (2008)
Issue (Month): 3 ()
Contact details of provider:
Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Find related papers by JEL classification:
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
- Ko Wang & Yuqing Zhou, 2006. "Equilibrium Real Options Exercise Strategies with Multiple Players: The Case of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(1), pages 1-49, 03.
- Ko Wang & Leslie Young & Yuqing Zhou, 2002. "Nondiscriminating Foreclosure and Voluntary Liquidating Costs," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 959-985.
- Jeremy C. Stein, 1993.
"Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects,"
NBER Working Papers
4373, National Bureau of Economic Research, Inc.
- Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
- Rose Lai & Ko Wang & Jing Yang, 2007. "Stickiness of Rental Rates and Developers’ Option Exercise Strategies," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 159-188, January.
- David M. Harrison & Thomas G. Noordewier & K. Ramagopal, 2002. "Mortgage Terminations: The Role of Conditional Volatility," Journal of Real Estate Research, American Real Estate Society, vol. 23(1/2), pages 89-110.
- Charles K. Y. Leung & Garion C. K. Lau & Youngman C. F. Leong, 2002. "Testing Alternative Theories of the Property Price-Trading Volume Correlation," Journal of Real Estate Research, American Real Estate Society, vol. 23(3), pages 253-264.
- Rose Neng Lai & Ko Wang & Yuqing Zhou, 2004. "Sale before Completion of Development: Pricing and Strategy," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 329-357, 06.
- Ko Wang & Yuqing Zhou, 2000. "Overbuilding: A Game-Theoretic Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(3), pages 493-522.
- Kam C. Chan & William G. Hardin III & Kartono Liano & Zheng Yu, 2008. "The Internationalization of Real Estate Research," Journal of Real Estate Research, American Real Estate Society, vol. 30(1), pages 91-124.
- Ko Wang & Yuqing Zhou & Su Han Chan & K. W. Chau, 2000. "Over-Confidence and Cycles in Real Estate Markets: Cases in Hong Kong and Asia," International Real Estate Review, Asian Real Estate Society, vol. 3(1), pages 93-108.
- Dieci, Roberto & Westerhoff, Frank, 2009.
"A simple model of a speculative housing market,"
BERG Working Paper Series
62, Bamberg University, Bamberg Economic Research Group.
- Jin Choi & Henning Rasmussen & Matt Davison, 2012. "Fair Value and Risk Profile for Presale Contracts of Condominiums," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 472-504, May.
- Robert Edelstein & Peng Liu & Fang Wu, 2012. "The Market for Real Estate Presales: A Theoretical Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 30-48, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (JRER Graduate Assistant/Webmaster).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.