To Accept or Not Accept: Optimal Strategy for Sellers in Real Estate
43 Pages Posted: 2 Jun 2013 Last revised: 28 Jan 2018
Date Written: January 5, 2017
We consider the problem of a seller who faces an unknown number of offers where each offer is a random draw from a known distribution. The objective of the seller is to maximize the probability that the highest offer is chosen. We show that the optimal strategy is characterized by a non-increasing stochastic set of reservation prices. This is in contrast to the classical search models where reservation prices are deterministic. Our analysis also provides theoretical support to the observation that first offers in residential real estate markets tend to be higher than subsequent offers. The model's prediction closely matches the empirical findings of Merlo and Ortalo-Magne (2004) that more than seventy percent of the properties sell to the buyer who makes the first offer.
Keywords: Real estate, Optimal selling strategy
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