Public Auction versus Private Negotiation in Residential Property Sales

Abstract

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.

Keywords:

• Housing auction sale
• privately negotiated housing sale
• residential property sales
• U.S. versus International housing sale methods

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 We thank the anonymous reviewer who questioned our assertion that sales commissions “offered” to selling agents were the exact amounts as sales commissions actually “paid” to selling agents at closing. We agree that some MLS systems may only report the sales commission offered to the selling agent when a property is listed for sale and entered in the MLS system, but not the commission paid to the selling agent when a transaction closes. However, we do not believe this is universal. MLS systems do not typically operate at national or state levels. Most are owned and operated by local REALTOR® organizations as wholly owned subsidiaries, or as is increasingly more common, as part of a consortium owned and operated by multiple REALTOR® associations within a particular region. In some areas, MLS systems are owned and operated by a group of cooperating brokers for their collective benefit. According to the Real Estate Standards Organization, as late as 2020, there were 636 independent MLS systems in the U.S. and Canada (see https://www.reso.org/blog/mls). Each MLS system defines variable fields unique to its area and establishes operational rules per local norms and customs. Variable field differences make sense. For example, it is unlikely that a home in Florida would include a basement, while one in Minnesota would. Accordingly, a Florida MLS system would probably not include the variable field “basement,” while a Minnesota system probably would. Differences in MLS norms and customs also make sense. For example, in some areas, sub-agency is offered while in others it is not, likewise for buyer agency or dual agency. MLS systems require that selling agents enter information about a sale when a transaction closes, including sale date, sale price, seller concessions, and type of financing. Depending on the norms and customs of a particular MLS, disclosure of sales commissions paid to the selling agents may also be required. We agreed with the reviewer that verifying MLS reported selling agent commissions against HUD statements for each closed transaction would be ideal for verifying actual amounts paid to the selling agents. However, the data used in our research was limited to MLS reported sales transactions only. To address the reviewer’s concern, we were able to speak directly with the Vice President of the MLS system operated by the Montgomery Area Association of REALTORS®. They verified that while their MLS system does not compel selling agents to report their actual sales commissions, their system’s regional norm was that the “offered” and “paid” selling agent commissions were the same amount. Out of curiosity, we had similar conversations with directors of other MLS systems operating in Alabama, and all confirmed the same normative practice.

2 Results are unreported but available upon request

3 We thank the anonymous reviewer who suggested our dataset would be more robust if we had included all available information from tax assessments, probate court records, newspaper notices, and the like. We agree that such an expanded dataset would have added greater depth to our study. Indeed, previous research shows that using datasets that include the entire population of real estate transactions are better suited than those containing only a sample (Cummings & Epley, 2012). Unfortunately, limited resources prohibited us from obtaining and using an expanded dataset. We suggest that future researchers include ways to overcome similar data limitations.

4 This information is reported by the National Association of REALTORS® at https://www.nar.realtor/membership/monthly-report