Factors Influencing Auction Outcomes: Bidder Turnout, Auction Houses and Market Conditions

Journal of Real Estate Research, The, Apr-Jun 2005 by Ong, Seow E, Lusht, Kenneth, Mak, Chee Y

Exhibit 5 also shows the marginal effect of the state of market (SOM). When the property market goes through two consecutive quarters of negative growth, the probability of a sale drops by about 50%. Further analysis (results available on request) show that the marginal effects for turnout and distress properties across different states of the market do differ (turnout: 0.097 for SOM = 1 compared to 0.046 for SOM = O; distress: 0.238 for SOM = 1 compared to 0.113 for SOM = O) though both variables are still highly significant. In contrast, the marginal effects for LRP remain insignificant for both states of the market.

Conclusion

This paper extends prior work on the probability of sale at auction by using a much richer set of explanatory variables. The findings indicate that bidder turnout and market conditions matter, as does the choice of auctioning agent. The findings also indicate that distress properties are more likely to sell, and a sale is more likely in markets not in decline.

This study is relevant for banks that foreclose properties, as most foreclosures occur when the real estate market is not performing well. The immediate implication is that the chances of selling a property successfully in an auction under poor market conditions are rather low. Hence banks or sellers should bear in mind that the previous empirical evidence on the size of auction discounts should be conditioned on a positive outcome or sale at the auction. In other words, the expected sum recoverable for a distressed property depends not only on the expected selling price at the auction, but also on the probability of an auction sale.

Finally, the marginal effect analysis detailed here demonstrates that bidder turnout-as an indicator of market interest-is also an important determinant of a positive auction outcome.

The authors wish to thank Paul Anglin and participants at the AREUEA 2003 conference and two anonymous reviewers for insightful comments. We also thank Nicholas Mak and Doreen Thang for initial discussions. The authors gratefully acknowledge research funding from the National University of Singapore (R-297-000-002-112).

Endnotes

1 Auctions are often announced well in advance through the press and interested parties are invited to inspect the properties. Typically, an auction session would comprise of at least half a dozen properties, depending on the auction house conducting the auction.

2 SISV records and tracks all private property transactions in Singapore.

3 Another measure of success would be whether the property not sold at auction was subsequently sold through private negotiations. This question is addressed in another paper in progress.

4 A distress sale is defined as an auction put up by a financial institution that has foreclosed on the property. We are unable to identify properties put up for auction by owners who are financially distressed.

5 Such a proxy assumes a rational seller who is willing to accept the current market price that is index-adjusted. This assumption may be violated in practice. We thank an anonymous reviewer for pointing this out.