A CRITICAL ANALYSIS OF THE DIFFERENT SYSTEMS USED TO SELL RESIDENTIAL HOUSES IN SCOTLAND

Abstract

This study analyses the efficiency of the two systems used to sell residential properties in the Scotland: first price sealed bid auctions and the fixed price system (where the seller accepts the first bid at a specified level). Sellers can choose which method they want to adopt when selling their property. Many previous studies of real estate auctions specify that market conditions are the main determinant of real estate auction performances. This is consistent with auction theory which indicates that the level of a winning bid in a sealed bid auction is determined by the number of bidders and risk aversion among the bidders. An increase in number of bidders is likely to result a high winning bid; also if the potential bidders are risk averse in the sense that they dislike the risk of not getting the auctioned object, the winning bid is also likely to be higher than if the bidders are risk neutral. When the market is strong, solicitors and estate agents therefore tend to advise sellers to adopt the sealed bid system despite the fact that this may increase the time on market. This study uses statistical methods to explore changes in the preference of sellers to the two systems over time and the extent to which the sealed bid system systematically generates higher sale price while controlling for different housing characteristics and different market conditions. Analysis is based on house sales data for the last two decades from Aberdeen city and Aberdeenshire area of Scotland.