Scandinavian Working Papers in Economics

Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin)

No 17/2: Determinants of a Foreclosure Discount

Herman Donner ()
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Herman Donner: Department of Real Estate and Construction Management, Royal Institute of Technology, Postal: Department of Real Estate and Construction Management , Royal Institute of Technology, Brinellvägen 1, 100 44 Stockholm, Sweden

Abstract: Using a dataset with individual appraisals of foreclosed apartments sold through auction in Stockholm, Sweden, the issue of selection bias and a potential overestimation of a foreclosure related discount on price is addressed. A mean discount of 7.9% with a corresponding median value of 9.5% is shown. A hedonic model is also applied. It is found that about half of the impact on price caused by a forced sale is attributable to the search process on the real estate market. These results contrasts from earlier research having explained a negative impact on price to seller motivational factors. These results provide insight towards the dynamics of a negative impact on price caused by a forced sale, and has the potential to allow stakeholders to model a potential discount in greater detail for individual foreclosed properties, and contribute to management of credit risk.

Keywords: Foreclosure; Hedonic Models

JEL-codes: D80; D82; R30; R31

36 pages, October 12, 2017

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