Bargain or Bust?

We examine foreclosure discounts and their subsequent impact on investor returns in Berlin's housing market from 1984 to 2022. Utilizing hedonic regression models and matching techniques on a data set of housing transactions, we determine that foreclosure discounts, ranging from 20 to 50 percent, are significant and persist over time. In a repeat sales approach, in which we explicitly account for the sequence of transactions, we show that initial investments in foreclosed properties yield average annualised returns surpassing matched non-distressed counterparts by 20.5 percentage points. However, when a foreclosure follows a regular sale, the average annualised returns are 9.6 percentage points lower than in matched non-distressed transaction pairs. Novel to the literature, we further show that this markdown is only associated with the foreclosure transaction, rather than putting a permanent stigma on the foreclosed apartment. Our ability to control for both observed and unobserved property characteristics suggests that this discount may be attributed to both a foreclosure stigma and the format used for foreclosure auctions in Germany. Consequently, our paper not only advances the foreclosure literature with new insights from a global city but also contributes to the discourse on auctions in a real estate context.