Fair Value and Risk Profile for Presale Contracts of Condominiums |
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Authors: | Email author" target="_blank">Jin?ChoiEmail author Henning?Rasmussen Matt?Davison |
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Institution: | (1) Department of Applied Mathematics, Middlesex College Rm 255, University of Western Ontario, 1151 Richmond Street North, London, Ontario, N6A 5B7, Canada;(2) Department of Statistical & Actuarial Sciences, Western Science Centre Rm 262, University of Western Ontario, 1151 Richmond Street North, London, Ontario, N6A 5B7, Canada |
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Abstract: | Developers usually presell new condominiums, requiring purchasers to make down payments on a contract that allows them to
purchase, at a fixed price, the finished condominiums on a later date. This presale contract is akin to a financial call option
sold by the builder to the purchaser of the condo. In this paper, we value the presale contract from both the purchaser’s
and the developer’s points of view. We examine the influence of various opt-out clauses, different interest rates and other
factors on the value of presale contracts. We discuss the extent of risk sharing between the purchasers and the developers
according to varying levels of down payments. We conclude that developers enjoy a reduction in risk without a corresponding
reduction in expected profits by holding a presale. |
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