Presales, Leverage Decisions, and Risk Shifting

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 tool 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 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.