Optimal Real Estate Pricing and Offer Acceptance Strategy

Abstract

We consider the problem of choosing the best of a set of sequential offers proposed by the market in a house-selling process. During each decision epoch, the seller sets a listing price, observes the offers and decides whether to accept the maximum one or to reject all of them. We model a fixed holding cost, which is the constant marketing cost of searching for buyers, and a variable cost that is proportional to the number of offers received during each epoch. The objective is to maximize the expected revenue. Most previous studies assume a stationary known distribution from which the buyers' offers are generated and which reflects the market valuation of the house. In contrast, we assume that the number of incoming offers, and the distribution from which each individual offer is generated, are affected by the seller's listing price (i.e., price-based demand response). Thus, we propose a new approach for the selling policy, which consists of the listing price and the offer acceptance threshold in each period. We derive the seller's optimal selling policy and apply it to a scenario involving the sale of individual residential properties in Ames (Iowa), which yields results consistent with empirical observations. INDEX TERMS Housing market policy, dynamic pricing, sequential decision making, optimal stopping.