Strategic behavior in pooled condominium auctions

Abstract

Real estate auctions were uncommon until recently, but are gaining popularity. In one estimate, Fortune [81 reported that the U.S. real estate sold at auction rose from perhaps $500 million in 1984 to $2 billion in 1987. More recently, the Chicago Tribune [3] has placed 1988 auction sales at over $2.5 bihion. This growth might not be noteworthy were it not accompanied by the cxpandcd USC of an auction procedure known as a pooled auction. When nearly identical properties are being sold, the pooled auction is of special theoretical interest and an attractive variant of the more familiar English auction method. Pooled auctions have been applied to sales of similar condominium units in a single development and to like-sized adjoining tracts of land. The intent of this paper is to examine the characteristics of the pooled auction, to compare it to the ordinary English auction, and to establish why this form is often chosen by real estate sellers and auctioneers. The results will then be applied to a 1987-1988 auction of similar two-bedroom condominium units. Since most real estate auctions involve dissimilar properties, the most common technique is to auction the properties one-by-one using the English or ascending-bid method. In this oral auction method, the bidding for a unit progresses upward, stopping when only one bidder remains active. Since the winning bidder needs only offer a minimal amount above the top bid of the second highest bidder to claim a unit, the sale price is approximately the valuation of the second highest bidder. Once a bidder determines his personal valuation for an item, strategy in an English