The Determination Of Optimal Reservation Price Setting For Homeowners

Abstract

This paper considers the problem of determining the optimal reservation price for a seller of real estate. Although there exists much literature regarding the appraisal of real estate and property valuation, little research has focused on the process through which the seller may set a minimum price that he is willing to accept when bids are received over time. An exploratory and preliminary model is developed from which an optimal reservation price is determined as a function of pertinent cash flows and an ex-ante declared cumulative distribution of bids. Bids arrive according to a Poisson process and are a function of the listing price. A numerical example is provided to illustrate the results.