An analysis of auction strategies in apartment sales

Abstract

Purpose This paper aims to empirically test the effect of list price and bidding strategies in ascending auctions of residential real estate. Design/methodology/approach Three regression models are estimated, using a unique data set from 629 condominium apartments in the inner-city of Stockholm, Sweden, sold between January 2010 and December 2011. Findings The results show that jump bidding has the predicted effect of reducing competition by scaring off bidders. However, a higher average bid increment leads to a higher selling price. Furthermore, results show that a fast auction in terms of average time between bids acts to increase the probability of so-called auction fever as both the number of bidders and the selling price are positively correlated with the speed of the auction. While the average behavior of all auction participants, in terms of jump bidding and time between bids, significantly affects auction outcomes, differences in strategies applied by winners and losers show mixed results. The results of this study with respect to sellers’ list price strategy show that underpricing is an ineffective strategy in terms of enticing more bidders to participate in the auction. Furthermore, underpricing is not sufficient to have a positive effect on the selling price. Originality/value This paper is one of the first papers to empirically analyze how different bidding strategies affect the outcome of residential real estate auctions in terms of competition and the final selling price.

Aggressive bidding strategies in real estate auctions – a structural equation modelling (SEM) approach

“…We find that all four of our aggressive bidding strategies yield a higher sales price. These results confirm earlier findings of a positive price impact from jump bids (Hungria-Gunnelin, 2018; Khazal et al , 2020; Sommervoll, 2020) and high opening bids (Sønstebø et al , 2021). Additionally, aggressive bidding strategies in the form of short acceptance deadlines and short response times yield higher prices.…”

“…Hungria-Gunnelin (2013) finds that the number of participants in an auction has a positive effect on the final price. Hungria-Gunnelin (2018) finds that jump bidding has the predicted effect of reducing competition by scaring off bidders. However, a higher average bid increment leads to a higher selling price.…”

“…In recent years, several papers have studied different aspects concerning bidding strategies in real estate auctions. Hungria-Gunnelin (2013) looks at the number of bidders in real estate auctions, and in 2016, she looks at jump bids and auction speed (Hungria-Gunnelin, 2018). Additionally, Khazal et al (2020) and Sommervoll (2020) study jump bidding, and Sønstebø et al (2021) study opening bid strategies.…”

Brokers’ list price setting in an auction context

“…Stevenson et al (2010) also argue that real estate agents adjust asking prices downwards to attract a higher number of potential buyers. In empirical studies of residential real estate markets Han and Strange (2016) and Hungria-Gunnelin (2018a, 2018b, find that sellers attract more bidders by setting a low asking price. Han and Strange argue that similar to online auctions, auctions of homes may trigger emotional bidding and as a consequence that winning bidders may overpay.…”

“…While there seems to be a consensus that a low list price tends to increase the number of bidders in an auction, there are only a handful of studies that empirically test this correlation. Han and Strange (2016) and Hungria-Gunnelin (2018a, 2018b) are, to our knowledge, the only studies that have directly investigated this relationship in a real estate context. Conclusions regarding the resulting effect on transaction prices are ambiguous.…”