Bidding Strategies at Residential House Auctions

Clare Branigan, Paul RyanUniversity College Dublin

Introduction

• This paper examines bidding strategies at auctions for residential property market sales in Dublin.

• The period under examination was September 2004 to December 2005 which was close to the peak of the property boom in Ireland

• At that time, sales of properties through the auction mechanism was more common for premium properties

Examples• In 2005, houses on Shrewsbury Road were among the most expensive

in Europe after 12 years of almost uninterrupted nationwide rises.

• For example, in 2005, a 4,000 sq ft (372 sq m) house on Shrewsbury Road (Dublin 4) set an Irish record when a buyer paid more than €58m for a home with extensive land to the rear that remains undeveloped.

• Despite having a guide price of €35 million, the house eventually reached €58 million due to a rumoured six potential buyers vying to purchase the property.

• In September 2011 the house went on the market again for a price of €15 million, down €43 million from its sale value in 2005, but was withdrawn presumably because it never met the guide price

Example: Walford Shrewsbury Road

Dublin Second-hand House Prices

€0

€100,000

€200,000

€300,000

€400,000

€500,000

€600,000

€700,000

€800,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Sherry Fitzgerald Research (2007)

Bidding Strategies and Open English Auctions

• Optimal Bidding strategies for sellers and bidders depend on the auction’s rules

• Open English auctions are a popular form of sale mechanism in Ireland, particularly at the premium end of the market.

• Open English Auction– The auctioneer calls the bid, and the willing bidder indicates

his assent by some slight gesture– The auctioneer raises the price incrementally or a bidder

can offer a higher bid– Eventually only one bidder is left who wins the auction

Bidding Strategies

• Actual bids can signal that an item’s true value has not been reached (Kagel, 1995) and increased bids by others can cause other to copy.

• Bidders use traffic as an indication of value, and more traffic implies higher value.

• This is consistent to Shiller’s (1990) theory on a shortage illusion.

Escalation of Commitment

• With escalation of commitment, a person allocates a resource –search costs, finance or intangibles (e.g., perception, self-identify) to further a goal.

• When the result is not achieved, they are disappointed, and therefore more committed to achieving the goal at the next opportunity.

Escalation of Commitment

• A Dublin property auction requires the successful bidder to pay a ten per cent deposit for the property immediately after the auction, which is non-refundable.

• Thus, a potential bidder is likely to have spent funds on a property survey and a title check prior to the auction.

• When the guide price is low, many bidders will have sunk costs before the auction, and will be committed to winning.

Endowment Effect

• Lower guide prices encourage more bidders to have sunk costs in terms of property surveys and legal checks

• This encourages participation in the auction which results in the endowment effect

• All of which results in higher sales prices

Sunk Cost Effect

• “The sunk-cost effect is an escalation of commitment & has been defined as the greater tendency to continue an endeavor once an investment in money, time or effect has been made,”(Arkes, Blumer,1985).

Sunk Cost Effect

• Although economic rationality states that sunk costs should be ignored and decisions be made on the basis of future benefits and costs, individuals tend to be retrospectively rational, justifying prior decisions (Shaw, 1981).

Types of Bidders

• Neophytes: get in early and fade away• Sniper: the guy who sits in the back row and jumps

in at the end when all bidding is finished• Jump Bidding: Jump Bids in high increments to

discourage competition• Flamboyant Bidders: Those who attract the

auctioneer’s attention by calling bids loudly or waving a paddle

Shina and Greenleaf (2000)

Bidder Aggressiveness

• Shina and Greenleaf (2000) results indicate that bidders at Open English Auctions need to be concerned about the aggressiveness of other bidders

Sniper

• A “sniper” is defined to be a late bidder at the auction; who does not bid until only one remaining bidder is left.

• Popular in online auctions; e.g., there is an active exchange in eBay’s chat rooms about how to snipe effectively; even bidding software that will bid for you at the last minute

• A sniper strategy can serve the purpose of signalling an aggressive strategy, sending the message “Don’t continue bidding as I am going to keep bidding higher”.

• This message discourages competition for two related reasons: – it suggests that the sniper bidder values the property

more than anyone else, and– & if the aggressive bidder drops out at any stage it

implies that you have overbid for the item.

• When a sniper influences competitors to drop out quickly, he wins the auction at a relatively low price & does not have to carry out the threat of bidding to a high level

• This reason suggests that auctioneers should maintain strict control of the bidding sequence in order to promote competition (Avery, 1997)

Data Gathered

• Data for all available auctions in Dublin area was collected between Sept 2004 and Nov 2005.

Summary: 1565 Auctions

Date Total %Sold %Prior %After %WithdrawnSep-04 146 37% 3% 17% 43%Oct-04 176 40% 5% 12% 43%Nov-04 72 32% 3% 18% 47%Dec-04 11 64% 0% 18% 18%Feb-05 44 50% 2% 25% 23%Mar-05 141 53% 1% 21% 25%Apr-05 146 42% 2% 25% 31%May-05 204 42% 10% 20% 28%Jun-05 178 44% 6% 20% 31%Jul-05 39 38% 0% 21% 41%Sep-05 168 36% 8% 15% 41%Oct-05 143 48% 1% 24% 27%Nov-05 97 45% 2% 13% 39%

1565 44% 3% 19% 34%

Methodology

• Observed over 200 auctions in this time period

• 105 were sold at auction, by an average of 44% over the guide price

• Proposition: The more bids a person makes, the more committed he becomes to winning the auction.

Bid Progression

•

1 950 1100 1200 1230 1240 1250 1260 1270 1275

2 1000 1150 1225

3 1050 1235 1245 1255 1265 1272

• For each auction, the number of bids for each bidder was counted, and the winning bidder was highlighted

• In 68% of the cases, the person who made the most bids was the auction winner, i.e., the bidder that is most committed to winning, places the most bids.

• This agrees with the theory that actual bids can signal that an items true value has not been reached (Kagel, 1995) and increased bids by others can cause other to copy (herding affect).

• Bidders use traffic as an indication of value, and high traffic implies greater value.

• Traffic influences the estimated value of an item, i.e., traffic often begets more traffic and infers value (Shiller, 1990; Simonsohn & Ariely, 2005).

Best Bidding Strategy – The Sniper

Winner1st Bidder

Winner2nd Bidder

Other Bidder

WinnerSniper

No. of Auctions 18 14 12 22

% Winner 27% 21% 18% 39%

% Over Guide 42% 47% 57% 36%

Samples

27 Belmont Ave, Donnybrook

Apr 05Guide 700,000

27 Belmont Ave, Donnybrook

Apr 05Guide 700,000

Sold 1.36 m, 4 bidders 94% over guide price

8 Temple Cresent, Blackrock

May 05Guide 650,000

8 Temple Cresent, Blackrock

May 05Guide 650,000Sold, 1.3 m, 5 bidders100% over guide

Samples: Priory Grove, Blackrock

March 05, €730,000

Priory Grove, Blackrock

•

April 06 ?

Priory Grove, Blackrock

•

April 06 ?

Initial: 730,00015% 109,000Upgrades: 90,000Total: 929,000

Priory Grove, Blackrock

•

April 06 €1.8m

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American Economic Review 76: 894-920.• Kagel, J. (1995). “Auctions: A survey of experimental research in J.H. Kagel & A. E. Roth (Eds.), The

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References• Arkes, H., Blumer, C. (1985). "The Psychology of Sunk Costs." Organizational Behaviour and Human Decision Process 35: 124-

140.• Avery (1997), “Strategic Jump Bidding in English Autions,” Review of Economic Studies 65, 185-210• Bazerman, M., Sameulson, W. (1983). "I Won the Auction but Don't Want the Prize." The Journal of Conflict Resolution 27(4):

618-634.• Diaz III, G. P., Levy, D. (2002). "Residential valuation behaviour in the United States, the United Kingdom, and New Zealand."

Journal of Property Research 19(4): 313-326.• Diaz III, H., A. (2001). "Behavioural Research into Real Estate Valuation Process: Progress Toward a Descriptive Model."

Research Issues in Real Estate 8: 3-30.• Diaz III, J., Hansz, A. (1997). "How valuers use the value opinions of others." Journal of Property Valuation & Investment 15(3):

256-260.• Filiz-Ozbay, E., and Ozbay, Erkut (2007). "Auctions with Anticipated Regret." American Economic Review 97(4).

• Galinsky, A., Mussweiler, T. (2001). "First offers as anchors: The role of perspective-taking and negotiator focus." Journal of Personality and Social Psychology 81: 657-669.

• Kagel, J. H., Levin, D (1986). "The winner's curse and public information in common value auctions." American Economic Review 76: 894-920.

• Kagel, J. (1995). “Auctions: A survey of experimental research in J.H. Kagel & A. E. Roth (Eds.), The handbook of experimental economics (pp.501-585). Princeton, NJ:Princeton University Press

• Sinha A., Greenleaf, E, (2000)“The Impact of discrete Bidding and Bidder Aggressiveness on Sellers’ Strategies on Open English Auctions: reserves and Covert Shilling,” Marketing Science, Vol 19, No. 3 Summer 2000.