To Accept or Not Accept: Optimal Strategy for Sellers in Real Estate

42 Pages Posted: 2 Jun 2013 Last revised: 28 Jan 2018

See all articles by Thomas Emmerling

Thomas Emmerling

Zicklin School of Business, Baruch College - The City University of New York

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: January 5, 2017

Abstract

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

Suggested Citation

Emmerling, Thomas and Yavas, Abdullah and Yildirim, Yildiray, To Accept or Not Accept: Optimal Strategy for Sellers in Real Estate (January 5, 2017). Available at SSRN: https://ssrn.com/abstract=2272936 or http://dx.doi.org/10.2139/ssrn.2272936

Thomas Emmerling

Zicklin School of Business, Baruch College - The City University of New York ( email )

One Bernard Baruch Way
Box C-403
New York, NY 10010
United States

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty/profiles/thomas-j.-emmerling

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Yildiray Yildirim (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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