Home foreclosure discounts in auctions without reserve prices

Abstract This article estimates foreclosure discounts in Cape Town, South Africa, where, until 2019, foreclosure auctions occurred without reserve prices. Using newly constructed data linking sheriff auction notices to the universe of property transactions, rich property characteristics, and municipal service‐request records, I document large foreclosure discounts that vary by empirical approach. In a cost‐adjusted hedonic framework, properties sold at foreclosure auction transact at a discount of 14.5% relative to comparable non‐foreclosed sales; repeat‐sales estimates yield substantially larger discounts of 30.2%. These estimates bracket the plausible range of the true discount: the hedonic provides a conservative lower bound after netting out buyer‐incurred transaction costs, while the repeat‐sales provides an upper bound that additionally captures time‐varying deterioration not fully observed in cross‐sectional data. The magnitudes documented here are large relative to settings with reserve prices, reflecting an institutional environment where the absence of a reserve price leaves auction outcomes effectively unbounded on the downside. The implications are especially severe in South Africa's recourse mortgage system: foreclosed borrowers who lose their homes at auction may also remain liable for any balance between the sale price and the outstanding mortgage, compounding the household‐level costs of foreclosure. The findings contribute to an understanding of how foreclosure‐price formation operates in a no‐reserve‐price auction environment, and of the implications of that institutional design for realized prices and homeowner outcomes.