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A study of agreements for sale as a source of residential finance Babalos, Demetrios John

Abstract

The basic purpose of this paper was to gain a better understanding of agreements for sale as a source of residential finance. This meant discovering what terms were being charged and why purchasers of houses used agreements as a source of finance versus mortgages. To this end, three hypotheses were derived in order to arrive at these answers. The first problem was to discover the relationship that existed between the state of the economy and the usage of agreements for sale as a source of residential finance. In addition, the influence on the terms charged was measured. The second area of investigation was to discover the effect of a house buyer's socio-economic status on the probability that he would have to use an agreement for sale. The basic question concerned whether a person with a low socio-economic status would be more likely to use an agreement. The terms charged were similarly analyzed. The third and final problem compared the terms on agreements and on mortgages. Was there greater variation in the terms amongst agreements than mortgages? If there were any variation, could this be due to differences in the quality of the borrower's financial collateral? To answer the first problem, data was collected for the year 1970 and 1971 on agreements for sale because these two years coincide with a recessionary and expansionary economic period, respectively. For the second problem, data was collected on mortgages for the year 1971. Purchasers under agreements for sale and mortgages were then all assigned a socio-economic status. Thereupon, the analysis was undertaken on the basis of the data collected. For the third hypothesis, the collected data for 1971 on agreements for sale and on mortgages was statistically compared. In addition, regression equations were derived between certain variables to arrive at relationships between terms. In concluding, it was found, that in a recessionary state in the economy, agreements for sale were in greater prevalence than in an expansionary state. The terms charged at such a time were much harsher than in a time of economic expansion. Purchasers with low socio-economic status tended to use agreements for sale more often than did buyers with a high index. In general, it was found that agreements for sale tended to have less harsh terms than did mortgages.

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