Home Foreclosure Discounts in Auctions Without Reserve Prices: Evidence from Cape Town

Policy Brief 214

Abstract

In South Africa, when a homeowner defaults on their mortgage, the lender may obtain a court order to repossess the property. Subsequently, the property is sold through a public auction at the local sheriff’s office. While it is common for auctioned properties to sell at a discount, global evidence indicates that these discounts are usually small, due to legislative safeguards at auctions. The most common of these safeguards is the use of reserve prices at auctions, which set a minimum acceptable bid and are typically based on the outstanding mortgage balance, unpaid taxes, or the property's appraised value. These safeguards are crucial, as economic theory suggests that without them, prices for properties sold at auction tend to be lower than if the same property were sold on the non-auction market.