Game Theory and selling a house

Today is the day that we sell the house. Well, accept an offer to sell the house. The past week has been a ball of stress.

It started off last Tuesday when we had a virtual sit-down with the realtors about the listing price. The market had been going bonkers since the spring and it was starting to slow down. We had a choice to make: price it low and throw the dice for a bidding war, or price it “fairly” and wait until someone sees it.

In a transaction like this — house or any unique non-commodity item really — everyone knows what’s going on. The seller wants to get as much for whatever they are selling and the buyer wants to pay as little as possible. This isn’t a secret.

But the way these play out is an interesting foray into game theory.

I’ll take a look at the “price high” model first.

Let’s say that you have a house that you think is worth, maybe even a bit higher, then put it on the market and wait. A hidden variable that’s not as immediately apparent is time — the time on the market. When a house it new on the market it has the feature that it’s fresh and new. People get excited.

Then if it’s not sold… it sits there until the seller drops the price.

You get a slight bump with the price drop, but it’s still just sitting on the market. Until it’s sold or you drop the price even more.

This is basically a very drawn-out Dutch auction.

From Wikipedia:"

A Dutch auction is one of several similar types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some participant accepts the price, or it reaches a predetermined reserve price. This type of price auction is most commonly used for goods that are required to be sold quickly such as flowers, fresh produce or tobacco. A Dutch auction has also been called a clock auction or open-outcry descending-price auction. This type of auction shows the advantage of speed since a sale never requires more than one bid. It is strategically similar to a first-price sealed-bid auction.

The thing with selling a house is you don’t have the urgency that you get with selling flowers.

The other option is price it low and hope for a bidding war.

That winds up making a semi-sealed first-price auction. The disadvantage with this is it relies on enough people being in the market to make this a profitable endeavor. I don’t know the behind-the-scenes of this but it may actually be an open bid auction or wind up with a hybrid like a traffic-light auction.

The asking price is kind of a reserve price for the sale. So it’s a real gamble that someone will offer more.

The first time around in 2019 we asked for what we wanted, then started dropping the price more and more until it became untenable. This time around we splashed in an amazing price. We have one offer in… and we’re waiting until noon Pacific time for any other offers that may come in.

While this is very serious stuff, it all boils down to game theory.