Aborted property transactions: seller under‐compensation in the absence of legal recourse

Abstract

Property purchasers who rescind on their contracts and forfeit the initial deposits are exercising their right to not proceed with the purchase. The deposit to purchase endows on the buyer an implicit call option that is valuable and the value exceeds the face value of the deposit. As such, real estate sellers and developers are not adequately compensated for the abortion risk, especially when there is no legal recourse for the sellers to seek specific performance and damages in the event of default. The historical value of this call is estimated by inferring a time‐varying volatility from Singapore residential price data over the last 20 years. The results show that real estate prices are more volatile in up markets than down markets, and that under‐compensation persists in both market conditions. This paper further highlights some measures to reduce the risk of aborted sales and the under‐compensation problem.

Citation

Eng Ong, S. (1999), "Aborted property transactions: seller under‐compensation in the absence of legal recourse", Journal of Property Investment & Finance, Vol. 17 No. 2, pp. 126-144. https://doi.org/10.1108/14635789910258516