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Presales, Leverage Decisions and Risk Shifting

Author

Listed:
  • Su Han Chan

    (Johns Hopkins University)

  • Fang Fang

    (Shanghai University of Finance and Economics)

  • Jing Yang

    (California State University at Fullerton)

Abstract

We set up a game-theoretic model for a market where the presale method (to sell a property before its completion) can be used together with construction loans and mortgages as a developer's financing tools for project developments. This model captures the interactions and dynamics among four players (developer, buyer, mortgage lender and construction loan lender) involved in the presale market. We find that the use of the presale method together with an increase in the leverage (by using construction loan or mortgage) have risk shifting effects to other players in the market. In our model setup, the developer is the one who benefits if the mortgage lender and construction loan lender do not adjust their interest rates based on the developer's presale strategy.

Suggested Citation

  • Su Han Chan & Fang Fang & Jing Yang, 2014. "Presales, Leverage Decisions and Risk Shifting," Journal of Real Estate Research, American Real Estate Society, vol. 36(4), pages 475-510.
    • Handle: RePEc:jre:issued:v:36:n:4:2014:p:475-510
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    File URL: http://pages.jh.edu/jrer/papers/pdf/new_current/vol36n04/9833-03.475_510.pdf
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    Citations

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    Cited by:

    1. Lu, Chien-Lin & Liao, Wen-Chi & Peng, Chien-Wen, 2020. "Developers’ perspectives on timing to build: Evidence from microdata of land acquisition and development," Journal of Housing Economics, Elsevier, vol. 49(C).
    2. Quan Gan & Maggie Rong Hu & Wayne Xinwei Wan, 2022. "Contract rescission in the real estate presale market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(4), pages 1054-1106, December.
    3. Su Han Chan & Ko Wang & Jing Yang, 2016. "The Pricing of Construction Loans," International Real Estate Review, Global Social Science Institute, vol. 19(4), pages 411-434.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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