The puzzle of the discount price for foreclosed houses: does the factor of competition explain more discounts?

Authors: Chin-Oh Chang, Chien-An Wang, Yi-Ju Chen

Journal: Chiao Da Management Review. Dec. 2008, 28(2): 1-39.

Keywords: Foreclosed house; Auction market; Competition

Abstract:
By analyzing the data of foreclosed and brokerage houses in Taipei from 2001-2002, we try to answer the question of “Does the competition affect the price discount?” and detect the following facts: (1) The average selling price for foreclosed houses in the bidding market was about 17.20% lower than that of the brokerage houses in the searching and bargaining market, with all other factors being equivalent. We propose that market mechanisms, such as exposed risk to buyers in purchasing foreclosed houses and the number of bidders, can better explain the d eeper-discounted price; (2) the price discount discrepancy was only 15.99% if one bidder is involved and multiple bidders actually increased this discrepancy between the two markets. This implies that full information disclosure may increase the competition and reduce the price discount of foreclosed houses in court-oriented auction market.