A Model of Negotiated Sales Applied to Real Estate Auctions

Recently, real estate auctions have grown substantially in depressed markets. This article develops a framework to compare the performance of auctions to that of negotiated sales. First, the article solves a search model that incorporates unforeseen shocks and compares how prices respond in the short-run and long-run. Next, auctions are considered. Auctions are shown to obtain discounts because a quick sale results in a poorer "match" between house and buyer, on average, than could be obtained by waiting longer for a buyer. The model predicts that auction discounts should be larger in down markets with high vacancies, and in less dense markets.