Installment land contracts, single-family houses and bargaining power

Abstract

Purpose The purpose of this paper is to add to the single-family house bargaining power literature by investigating the bargaining power of the principals when the seller provides financing with an installment land contract (ILC). Design/methodology/approach Generalized spatial two-stage least squares regression is used to analyze data from 998 ILC transactions and 19,376 traditionally financed transactions all of which occurred in Montgomery County, Ohio between January 2002 and March 2011. Findings The results indicate that buyers using an ILC operate at a bargaining power disadvantage. In our sample, they paid approximately 6.64 per cent more, on average, than did buyers using traditional financing to purchase similar housing. This result occurred despite the fact that the included ILC transactions were limited to those carrying an interest rate that was above the Federal Housing Administration (FHA) rate at the time of contract origination. Research limitations/implications The study is limited to transactions that occurred in one county of a Midwestern state over a ten-year period. Therefore, the results may not apply in other locations. Valuable extensions of the current study would include an investigation to determine if similar results apply in other local housing markets. In addition, an examination of ILC transactions for other property types (e.g. undeveloped land, commercial properties, etc.) which may involve more sophisticated vendees could prove interesting. Originality/value This is the first study to investigate bargaining power in the single-family house market by focusing on ILC transactions. In this rather unique market segment, evidence of an imbalance of bargaining power is found. The results suggest that prospective purchasers, real property investors, fee appraisers, county auditors and others interested in determining the value of a single-family house using the transaction price of comparable properties take precautions in identifying comparable properties. The results indicate that house acquisitions facilitated with an ILC may not be a good comparable for a traditionally financed property and vice versa.