Mid Sweden University

Foreclosure is the forcible sale of real estate properties to pay debts. Earlier research indicates that foreclosed properties are sold at a discount. Since these studies typically rely on observational data that compares forced sales with (non-forced) open market sales, they quite likely suffer from selection problems. Furthermore, the mode of sale as an explanation for foreclosure discount is often overlooked. We add to the literature on foreclosure discount in three ways. 

First, we use an RCT-designed field experiment, run in cooperation with the Swedish Enforcement Authority over a three-year period (2019-2022) to evaluate if brokered sales outperform auction sales. We find that brokers beat auctions and that their sale prices were 14 percent higher compared to the auction sales. In addition, we find a foreclosure discount in the auction mode, where the sale price is substantially below the assessed market value. For the brokered sale, we do not find such a discount.

Second, building on the idea that there are many barriers to attending, participating, and buying in the auction that are absent in the brokered sale, we provide a theory that the auction discount can in part be due to uncompetitive bidding in the auction by professional buyers (i.e., there is collusion).

Finally, using historical data on foreclosure sales, we provide evidence for our theoretical mechanism.