Do brokers beat auctions in the sale of foreclosed real estate property? RCT evidence from Sweden
Extant research demonstrates that there is a foreclosure discount for real estates sold during foreclosure compared to similar real estates sold voluntarily at arms-length on the open market. In Sweden this involves a comparison of compulsory sale at a public auction administered by the Swedish Enforcement Authority - SEA (Kronofogden) with voluntary brokered sale. However, the impact of brokered sale during foreclosure has not been investigated previously. This is possible in the Swedish setting, since SEA is legally obliged to choose between these two different sale modes in each compulsory sale case.
Even though both modes are compulsory from the perspective of the foreclosed homeowner, the conditions for the sale are quite different. Auction sale is much formalized: the sale is advertised under SEA flag, there are limited opportunities for intending buyers to examine the property, and the auction takes place physically at SEA in an English-style auction, in most cases without a meaningful reserve price. By contrast, brokered sale mimics an open-market sale since the broker handles all aspects of the sale up until the signing of the contract. In both instances, the market value for each real estate is professionally appreciated by SEA.
In this study, sale mode – auction or broker – is randomized by SEA for real estates that fulfil the legal criteria for brokered sale. Brokered sale is the treatment variable. The main outcome is sale price. This RCT design allows us to answer the following research questions: How do sale prices vary during compulsory sale of real estates on public auction versus brokered sale? How does market value impact sale price for these two sale modes? What are the implications of brokered compulsory sale for the foreclosure discount? The design also allow us to examine if failure to sale is different between the two sale modes.