On the use of auctions as a disposition strategy for RTC real estate assets: A policy perspective

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Abstract
A sound strategy for real estate asset disposition is of paramount importance to the Resolution Trust Corporation (RTC) in its efforts to maximize costs resulting from the savings and loan bailout. A popular current approach to this problem is to employ expeditious sales structures such as auctions. Although auctions clearly speed up the disposition process, it is unclear whether they maximize net revenues. This paper analyzes the potential of auction structures to maximize sales revenue when such structures are applied to RTC commercial and residential real estate assets. Absent political constraints, we conclude that auctions are usually inferior to traditional listing and broker sales channels. For the commercial real estate sector, this conclusion is based on the prominence of information‐acquisition costs, on market thinness on the buyer side, and on continued uncertainty regarding local economic recovery. Our conclusion for the residential real estate sector is based on the degree of property concentrations and the apparent inferiority of auctions for residential properties in weak markets. A recognition of short‐term political reality bolsters the case for auction approaches; however, the RTC should clearly stop promoting an image that it wishes to “sell, sell, sell.”