Bargain or Bust? Prices, Discounts, and Returns in the Market for Real Estate Foreclosures

Alexander Daminger and Simon Wiersma

ERES from European Real Estate Society (ERES)

Abstract: We examine foreclosure discounts and their subsequent impact on investor returns in Berlin's housing market from 1984 to 2022. Utilizing hedonic regression models and matching techniques on a data set of housing transactions, we determine that foreclosure discounts, ranging from 20% to 50%, are significant and persist over time. A repeat sales approach, which considers the sequence of sales, shows that initial investments in foreclosed properties yield average annualized returns surpassing matched non-distressed counterparts by 20.5 percentage points. However, when a foreclosure follows a regular sale, the average annualized returns are 9.6 percentage points lower than in matched non-distressed transaction pairs. Our ability to control for both observed and unobserved property characteristics via repeat sales suggests that these disparities may be attributed to both a foreclosure stigma and the format used for foreclosure auctions in Germany. Consequently, our paper not only advances the foreclosure literature with new insights from a global city but also contributes to the discourse on auctions in a real estate context.

Keywords: distressed properties; foreclosure auction; foreclosure discount; Real Estate Investment (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2024-01-01
New Economics Papers: this item is included in nep-ure
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Working Paper: Bargain or Bust?. Prices, Discounts, and Returns in the Market for Real Estate Foreclosures (2024)
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