Summary
Little is known of the effects of the auction mechanism in relation to post-auction market sales. This empirical study of unsuccessful auctions shows that approximately half of these properties were eventually sold via private negotiations, at higher prices relative to last bids. The probability of a subsequent post-auction transaction is significantly higher for apartments and terrace houses and when auction turnout is high; and lower in the absence of any bid and in some years. In addition, downward revisions to the opening bid improve the probability of subsequent sale. Prices of subsequent re-auctioned and privately negotiated sales decline with time to sale, consistent with the search process explanation.
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Extract
Price Discovery in Real Estate Auctions: The Story of Unsuccessful Attempts
Introduction
Auctions have been extensively studied for many reasons, not the least of which is that the auction mechanism provides a close approximation to the Walrasian concept of market clearing and price discovery. Real estate auction, in particular, has an added attraction in that it provides a centralized platform for buyers and sellers in an otherwise highly decentralized real estate marketplace. However, the study of price discovery during and after the auctions, in particular the effects on post-auction prices and multiple auctions attempts, have been somewhat neglected in the literature.Ashenfelter and Genesove (1992) is one of the few papers that has examined post-auction price behavior. The authors show that the auction prices for identical condominium units in New Jersey were 13% higher than the prices determined in subsequent face-to-face bargaining. This arose because of the unique institutional framework where the "hammer price" is not necessarily binding,1 and an original auction sale could "fall through." This paper complements the earlier work by using data from an institutional setup that binds hammer prices and auction sales. Under this alternative framework, it is clear that only genuine bidders participate at the auctions. However, unsuccessful sellers could seek out interested buyers after the auction and privately negotiate. It is not uncommon for auction houses and sellers to engage in subsequent negotiations when the auctioned object is unsold at its reserve price (Bulow and Klemperer, 1996; footnote 22).Porter (1995) observes that oil and gas tracts that were not sold at auctions were re-auctioned subsequently at higher prices. Cassady (1967) and Ashenfelter (1989) also note that g...See the full content of this document
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