Public Auction versus Private Negotiation in Residential Property Sales

The U.S. residential real estate market is unlike international markets of Australia, Singapore, and New Zealand, where public auctions are common or even preferred by property sellers, particularly for new homes. In these foreign markets, excess demand and supply shortages drive sale price premiums for auctioned properties. We use residential property sales for 2000-2017 from Montgomery, Alabama, to investigate latent differences between sale prices for properties selling at public auction versus sale prices resulting from privately negotiated transactions closed by real estate agents who report results to their regional multiple listing service. Of the residential properties in our sample, only 0.6 percent sold via auction, and there were no sales of newly constructed homes. Properties sold by auction demonstrate reduced information asymmetry and improved pricing accuracy; however, these properties tend to be in the lower price range, older, lower quality, previously on the market for a more significant amount of time, and those selling at lower prices. In addition to using other econometric methods, we incorporate a factor analysis, a method not often used in real estate research but well suited to our study. New homes sold via private negotiation show the highest orthogonal factor loading. At the same time, our demand and bank-owned property variables have higher factor loadings for publicly auctioned properties. Our conclusions persist even after removing foreclosed properties from the analysis.