PRICE DISCOVERY AND EFFECTS OF REAL ESTATE AUCTIONS

Abstract

This paper attempts to discover the reserve price in the form of an expected indicative price (IP). It was found that over 65% of the successful auction cases' reserve prices could be gauged by the indicative price. Another interesting finding is that repeated auctions of the same property would result in lowering seller's revenue as evidenced from the lower final bids differences between succeeding auctions attempts. Empirical evidence of unsuccessful auction sales suggests that these properties generally fetch higher market prices in post-auction private sales' than expected. Taken together, these results indicate that over exposure in auction attempts should be minimized to maintain a reasonable amount of seller's revenue while a single exposure to a prior unsuccessful auction may be beneficial for subsequent private market sale. Probit and logit analysis reveal that the concept of indicative price may be a feasible proxy for the hidden reserve price. Significant determinants of successful auction cases are the level of reserve price, state of the market, the relative period of having an auction and certain auctioning houses such as Knight Frank and Colliers Jardine.