Estimating the Foreclosure Discount in Financially Distressed Hotels

Abstract

This study investigates the magnitude of the distress sale and foreclosure sale discount in financially distressed hotels by determining the influence of financial distress conditions on hotel transaction prices. Using a hedonic pricing model and a sample of 6,340 distressed and non-distressed transaction prices from 2008 to 2016, the study’s results show a significantly negative effect of financial distress on the pricing of distressed hotels. In particular, the estimated discount is 33% for an auction/trustee sale, 30% for a short sale, 42% for a foreclosure sale, and 44% for a real estate owned (REO) sale, all relative to non-distressed normal market sales.