Real Estate blind auction - who benefits?

Question

The housing market in Portland, OR is extremely hot. So hot that realtors are now using blind auctions. Listings say

Offers will be reviewed on [date] at [time]

Prospective buyers are expected to submit offers without any specific knowledge of what other buyers have offered. The realtor will inform bidders that other offers have been received but don't provide bid amounts. There is no actual competition, bidders are not given a chance to change their bids before a winner is chosen.

I am going to be both a seller and buyer in the near future, and I want to understand the reasoning and motivation for using a blind auction.

Who benefits from a blind auction?

I can see that a buyer doesn't benefit and can lose out in situations where they might have been able to bid up slightly.

The sellers can definitely lose because an open auction might result in a higher final price.

Since this system is being promoted by the realtors, I'd guess they benefit but I don't see how. Their motivation is to close the sale as quickly as possible, and whether the auction is open or blind makes no difference if a cutoff date/time is set.

So, is there a sound reason based in economics or game theory, and if so, to whose benefit?

Answer 1

The goal is to persuade potential buyers to make their best offer immediately, since they know that if they try to go cheap someone is likely to outbid them.

In a hot market, with an attractive property, this can actually work fairly well for the seller, especially if they need the sale to go through relatively quickly. Remember that until the sale, the owner is paying insurance and taxes and maintenance... and they may want the money so they can reduce how much interest they're paying on the next house.

There is a risk that none of the bidders was seriously interested, but it's a relatively small risk, and that can be handled via "best offer over the-least-I'm-willing-to-accept."

It works for the same reasons eBay's best-offer mode works; if you have at least one serious bidder they will usually offer a fair price. Not the most you could possibly get, but realistically you weren't likely to find that perfect sucker\\\buyer anyway.

Several houses in my neighborhood have sold this way, including one newly gut-renovated one that went for over US$1M. (I didn't expect them to get more than 900k for it.)

Answer 2

The sellers can definitely lose because an open auction might result in a higher final price.

Or it might not. In an open auction the seller will get slightly more than the 2nd highest bidder is willing to pay. That is unlikely to be the most the highest bidder is willing to pay.

Blind auctions are an attempt to get each bidder to offer their genuine best price. It's not guaranteed to work of course but it's certainly plausible that it might get a better price than an open bidding process.

Answer 3

I have flipped houses for years and have gone through every auction process imaginable plus worked for an auction house.

Blind auctions are used when there is a very finite group of buyers. Or in some cases you know exactly who the buyers are and the buyers might also know each other.

A traditional auction is used when you have a property in normal range in a decently populated area that will have a good amount of interest. For 90%+ of the properties a traditional auction with the right promotion and auctioneer will get you a much much higher return.

Let's take some use cases for a blind auction. Let's say that you have a house that is $1millon+ in a small town. The house may be a commodity in that there aren't many like it but again in this small town there aren't many people that can afford it. You don't want 3 guys showing up to your traditional auction. Within 5 mins these guys could have a side deal to limit the sale price of the house or just recognize that they are just bidding each other up and stop.

Well you might say well they can find each other for the blind auction too. Well maybe but probably not. I had thought I had done this several times when buying houses - colluding with other flippers - to find the one guy we didn't know about outbid us (and get something at 80% of market vs 70%). And in my opinion it is rather easy to manipulate blind auctions. The seller can usually always say that this person bought it at a higher price if a low price actually won.

Now why are real estate agencies doing blind auctions in your area. First there could be a real estate frenzy there especially with certain home types and they are hoping that paranoia will take over and people will reach much higher than market (this same thing would happen at a traditional auction too). They could also be trying to play a "cool" factor. I am guessing they wouldn't do this for the 150K two bedroom dump in a shady area.

But really why wouldn't a real estate company do this if sellers let them? Their costs is mainly their time. Their profit has little to do with what price you sell your home. So let's say you have a 900k house and because of the blind auction you only get 850k... not a big deal to real estate company because the time and money they saved on not having to sell your house traditionally offsets the small percentage of commission lost at a 50k difference.

To the average (uneducated) seller the real estate company wins no matter what. If the seller gets 850k for the home the real estate company tells them reasons why their house wasn't worth 900k. If they get 900k they tell them - look how quick we sold it (no shit its an auction). If they get 950k they say, see how the blind auction worked! When in most cases the blind auction probably reduced the final sale price.

The only two things a blind auction are good for is to separate colluders and to allow people to bid without having to provide proof of payment ability. In some traditional auctions you have to either bring "cash" or proof of ability and you would be capped at an amount.

What I would suggest and it seems that any reasonable real estate agency would do this is to not do blind auctions but to do blind bids for a week. I have sold many houses this way and it is the quickest and most profitable. It is not meant for a fixer up but works for a "good" house. You simply let people bid blindly and allow them a certain amount of bids per day or week. You can tell them on the spot if there bid is accepted as the high bid. At the end of the week if they are not the high bidder they are allowed to bid one more time. House sold.

So to answer your question... Of course the real estate agencies benefit. Did you think it would be any other way? And of course if they benefit guess who doesn't benefit?

Answer 4

It's hard to say if this will result in a higher or lower sale price.

I presume the reasoning behind a closed bid auction is that one potential buyer may be willing to spend significantly more than others. Suppose you looked at a property and decided that you were willing to pay, say, $200,000 for it. They hold a conventional, open bid auction. Someone else bids $100,000. Perhaps you bid $120,000. They bid $130,000. You bid $140,000. And then no one else offers another bid. You were willing to spend 200 but you got the property for only 140. Presumably you go away very happy. If the seller knew that you were willing to pay 200, he'd go away very disappointed.

But in a closed bid auction, you don't know what others are willing to pay. If you think that others may be willing to pay 200 or close to, then you will submit a bid for 200. If the next highest bid is only 130, or for that matter if the next highest bid is 50, too bad for you, you committed to 200.

On the other hand, it could work to the disadvantage of the seller. Bidders who are not desperate to get this particular property may deliberately bid low just to see if they can get a bargain. Bidders may underguess what others are willing to pay. If everyone guesses low, the property could sell for less than what they could have gotten in an open auction.

There's also the psychological factor in an open auction. Suppose you arrive thinking you are willing to spend $200,000. The bidding gets to this amount and you bid the 200. Then someone else bids 205. You may very well say to yourself, "I'm already prepared to spend 200, what another 5 or 10?", and bid 210. The other person thinks the same thing and bids 215. You say, "Okay, just 5 more" and bid 220. Lots of people have gotten caught up in the excitement of a bidding war and ended up paying way more for something than they arrived thinking they would spend. (People going to their first auction are often advised to decide on their maximum bid in advance and not to go over this no matter what, precisely because it is so easy to get caught up in the bidding.)

Answer 5

Since you asked specifically about game theory, it's worth noting that this type of auction also goes by the more formal name "first-price sealed-bid auction." If you search on that term, you may find more of the math and game theory that goes into it.

As regards who wins more generally, it depends a lot on who bids - and maybe more importantly how many people bid.

In a circumstance where many serious bidders are expected (and the bidders themselves also expect competition), this probably plays out for the seller. Bidders will be motivated to bid closer to their true valuation of the property because they don't want to lose by a small margin. If you believe the bidders are rational, then they won't bid more than their true valuation anyway, and so there might not be much expected gain in trying to work one bidder against another in an open, iterative process. What the seller loses in this scenario is the opportunity to play multiple bids off of each other and possibly generate an "emotional" response that gets the bidders to act irrationally by paying more than their actual valuation.

In a circumstance where there are few serious bidders (or the bidders expect little competition), then the sellers may not do as well since they will have forgone the possibility of holding the house longer to wait for a more motivated buyer. This can be mitigated some by setting a reserve price (a price below which the auction is void).

If you are a bidder and you're very motivated, a strategy that I personally saw work once was the following: "We bid $1 more than the next highest bid." The rules of your auction may or may not actually allow this though and, if you make such a bid, you are committed to that price even if someone comes with a substantial offer behind you. (Don't ask me what happens if two bidders submit such a bid!)