Academic journal article Journal of Real Estate Literature

Forced Sale Values vs. Market Values in Italy

Academic journal article Journal of Real Estate Literature

Forced Sale Values vs. Market Values in Italy

Article excerpt

In real estate economics theory there are circumstances where alternative bases of market value (MV) may be required or more appropriate. Such bases may either reflect the utility or functions of a property other than its marketability or unusual or non- market conditions. In this paper, we discuss and analyze the concept of the so-called forced sale value (FV). According to TEGoVA, FV is ''a sum that could be obtained for the property where, for whatever reason, the seller is under constraint requiring the disposal of the property'' (TEGoVA, 2012, p. 32). This value applies to an asset sold at a forced sale (i.e., foreclosure or execution), which is likely to sell for a price significantly below the asset's MV (Mitchell, Malpezzi, and Green, 2009; TEGoVa, 2012).

As emerged from a recent literature review conducted by Canesi (2015), the qualitative definition of FV is usually considered in comparative terms to the concept of MV. The quantitative assessment of FV is generally evaluated as a percentage discount to MV, hence it is of great interest to disclose the quantitative relation between these two values. Prior to investigating and quantifying the relation between MV and FV, it is fundamental to define and characterize both the competitive market and the foreclosed properties auction market. These markets differ in many features, but are nonetheless closely related.

In the Italian literature, FV has always been investigated qualitatively, while little research has been conducted on the quantification of the main state variables, such as prices and selling time. The aim of the present study is therefore to analyze the Italian real estate forced sale auction market. In Italy, such auctions are a secondary sales channel used in the event of bankruptcy and default on mortgage payments (foreclosures), or in other words as a tool for implementing the forced sale of a property. By Italian law, if an individual or a company fails to pay their debts, their property may be foreclosed and liable to a forced sale. This enables financial institutions to ensure that their investment is covered. Since 2005, a thorough reform has been undertaken by the Italian legislature in an effort to improve the process of foreclosure and forced sale with several specific decrees. In order to understand the ratio legis behind these reforms, we need to emphasize that various legal offices (from the end of the 1990s onwards) have clearly demonstrated that the main reason for the inadequacy of the Italian real estate foreclosure process lays on the separation of sales by court order from the competitive real estate market. As a consequence, there is a very limited participation at auctions by potential buyers and auctions are almost monopolized by small groups operating with speculative intents (Fontana, 2007). Furthermore, this separation gives rise to a severe imbalance between supply and demand, in terms of excessive supply. Drawing inspiration from best practices, the legislature has therefore modified the law to bridge the gap between the foreclosure auction market and the competitive market where properties are sold by private negotiation. An effort has been made to improve the visibility and to protract the marketing time of real estate forced sales. The above considerations confirm the close interdependence between MV and FV.

We first examine the literature focused on FV quantification, both as an independent value and in relation to other bases of value. Second, we focus on the methods proposed in valuation theory for quantifying the relation between FV and MV (discount vs. premium). Successively, we examine the main characteristics that most influence the extent of this gap, both in the international and national literature and we characterize the Italian auction market. A comparison is drawn between valuation theory and Italian real estate forced sales. Finally, starting from the assumption by Knight, Sirmans, and Turnbull (1994) of a close link between listing and selling prices, we try to define and thereby quantify FV. …

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