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Raise, Stay, Withdraw – How to Deal with Real-estate Negotiations?

Who is ready to play a short game to start this off?

So the rules for the game are as follows:

  • This is a game that should be played without communication between players
  • All players choose one positive integer between 0 and 100 (inclusive)
  • Duplicated numbers are disqualified
  • The highest remaining number is the winner
  • Submit your answer in the forum below!

Important Note: If you want this game to work and function properly, please only enter one number per person. I know I can’t stop you but please!!

We will play this game for two rounds. I will announce the winner in the comment section at the end of April 28th.

Then we can proceed to play a second round at which time all previous answers will be disregarded. (Starting new on April 29th). Feel free to come back again and play this game one more time!! (Second winner announced at the end of April 30th)

What were your thoughts when you played that game? How did you pick the number you picked? Can you give a valid justification?

You were probably guessing what everyone else would do and based your decision off of those guesses.(It’s ironic that I am “guessing” what you did) Maybe you haven’t realized but this kind of guessing games are very common in real lives. Real-estate negotiation is an obvious example. In fact, I think this game is somewhat similar to a real-estate negotiation. I am a seller who is trying to sell an item at $100. I would prefer higher offers and I didn’t allow duplicates because I am tired of dealing with multi-offer negotiations. In reality, multi-offer negotiation is something no one can avoid. No sellers would prevent multi-offer negotiation because more competition is only going to drive up the ceiling of the price, which only means more profit for the seller. It only means trouble for the buyers as a lot of people have trouble dealing with it because there are so many strategies and factors involved.

This is an important issue in the global community because I see a lot of people feeling regret after they make their decisions in real-estate negotiations. Real-estate negotiations are underestimated for the potential impact they can have on a family or a community. Real-estates most likely represent the single most valued item a family possesses. This makes the negotiations awfully important because they determine where they are going to live for the next few years or even decades. The value of the house also matters because the price can create anxieties on the family members which can lead to stress. I want to help people distressing about their negotiation decisions by analyzing their best option.

A Personal Story

I interviewed my aunt since her family just bought and moved into a new house about a year and a half ago. My aunt stressed about how real-estate negotiation “is a big deal”. It is very time consuming and definitely not easy because good houses are expensive. I found out there is a lot of stress about buying a new house because people do not want to overpay, but at the same time, they want to find the house they like (with no potential problems). In addition, my aunt mentioned that another trouble she had with time management. She had to search online and go to look at different houses every weekend. It becomes especially annoying when the kids have activities in the weekend. She said it is certainly not easy to find a perfect house because the process is emotional and physical consuming. When she lost a negotiation, she felt disappointed and sometimes regret for not offering more money. The time when she won, the entire family was very excited since they finally found the one that every family member likes.

 

Has your family ever had to deal with a multi-offer real-estate negotiation?

Yes
No
I’m not sure

QuizMaker

So I want to propose a CHANGE to people’s mentalities! People need to feel confident and strong about the decisions they are making in everyday life, starting with real-estate negotiations!!

Here is where GAME THEORY comes in – your default go-to for decision-making!

In order to utilize the “theory” in “game theory”, we need to first identify the players and strategies available in the negotiation. The players in this game are the people who are offering a deal to buy a particular house. To keep it simpler, we will assume there are only two buyers (players). Now we will investigate what are the strategies (actions) you can take. If you have submitted a bid and the real estate agent then announces that you are in a multi-offer situation, you are left with three choices. You can choose to keep your original offer, withdraw your offer, or offer a higher price. Both players thus have three strategies to choose from: Raise (the price), Stay (at the original price), or Withdraw (the offer).Since the winner on the bid will probably have to overbid in order to win, “Raise” is necessary in order to win. Thus one should then bid exactly the number that one has calculated it to take in order to win the bid on the home.

Q: How would I ever know that exact number?

That number is dependent upon many different factors. When I interviewed my aunt, she gave me some insight into the multi-offer negotiation. Some factors she considered when she chose a real-estate included location, house quality and size. and price/area ratio. She has experienced a multi-offer negotiation before. She decided to increase the price between the range of $2000-5000, or put down more down-payment. Other factors one need to consider when trying making a decision may include the amount of money you have at the time and the urgency of the issue (or how bad do you need a house at the time). This is where utility theory can be helpful to make some decisions. Utility theory basically assigns a number to your feelings. A positive number represents something good for you while a negative number is a disadvantage for you. Thus both players prefer a larger number in the end.

Sample  Scenario

Context: Buyer 1 and Buyer 2 both love the house. Their original offers matched exactly with one and another.

Buyer 2
Buyer 1 Raise Stay Withdraw
Raise (-1, -1) (1,-1) (1,-3)
Stay (1,-1) (0,0) (2,-3)
Withdraw (-3,1) (-3, 2) (-3,-3)

 

Explanation of matrix and each cell: (note: the payoff I assigned is arbitrary and it definitely differs from person to person)

In quotes, the first number represents the payoff for buyer 1 and the second number represents the payoff for buyer 2.

Raise + Raise: (-1, -1) Neither players won the house yet but they raised the price of the house together meaning they have to pay more to win.

Raise + Stay: (1,-1) Buyer 1 won the house is a +2 utility, spend more money -1. Buyer 2 lost the house and feels regret for not raising the price which results in a -1.

Raise + Withdraw: (1,-3) Buyer 1 won the house is a +2 utility, spend more money -1. Buyer 2 gave up, lost any chance of winning which I assign a -3.

Stay + Raise: (-1,1) Same logic as Raise + Stay.

Stay + Stay: (0,0) Neither players won. Essentially nothing happened.

Stay + Withdraw: (2,-3) Buyer 1 won without paying more and Buyer 2 gave up.

Withdraw + Raise: (-3,-1) Same logic as Raise +Withdraw.

Withdraw + Stay: (-3, 2) Same logic as Stay + Withdraw.

Withdraw + Withdraw: (-3,-3) Both players gave up, missing chance of winning at all.

Analysis and Solution

No one would pick withdraw because no one prefers a -3 payoff (dominated by other two strategies). So both players are left with either to raise or to stay. According to Nash Equilibrium, the solution would be both players raising the price, leading to a payoff of (-1,-1). However, the Pareto optimal solution ( the best solution for society as a whole and better for both players) would be (0,0) which is only possible if both players choose “stay”. By choosing “stay”, you are giving your “opponent” a chance of winning the house and you should definitely not risk it. So my final suggestion in this scenario would be to raise the price.

Hope that made sense because now it is your turn to try it!!!

The picture below is a random house I found online  that is on the market. Imagine you are the buyer now and you are interested in this house. What would be your initial offer?

Please click on the picture to view more details about this house.

 

Complete the survey with your proposal. I will create a google group with all the people participating and we can have a discussion in there. We will talk about the most logical solution in this case based on everyone’s preference and initial offers. I will also send out a separate google form for the multi-negotiation deal and we will finalize a winner.


Conclusion

For more complex multi-negotiation deals, there are several websites that can be extremely helpful. Check out the links below:

https://www.nar.realtor/policy/professional-standards-and-code-of-ethics/a-buyers-and-sellers-guide-to-multiple-offer-negotiations

http://www.inman.com/2013/03/07/mistakes-avoid-when-negotiating-multiple-offers/

http://realestate.usnews.com/real-estate/articles/how-to-navigate-a-multiple-offer-situation-when-buying-a-home/

After all, I just hope you have realized that you should not be upset about your decisions because you have done your due diligence and calculated that you made the optimal play. It is just a difference in the process of evaluation, not incorrect decision making. You should always be confident about the decision you make because you believe they are right and you justify them with hard-core evidence. “Happiness is the art of never holding in your mind the memory of any unpleasant thing that has passed.” Be happy and you will always be the winner! 🙂

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COMMENTS: 4
  1. April 28, 2017 by Max

    Hey, I found it very interesting how you can apply an economic theory to real life scenarios and see what benefits you would be getting from it.

  2. April 29, 2017 by Shu

    Update: The winner for the Duplicates Game (Round 1) is Soho with a number of 98!!! Congratulations!!

  3. May 02, 2017 by Ryan F

    Hey Shu, I really enjoyed how you applied game theory to this scenario. Having the user participate was a great touch and made the presentation really interactive. Nice work!

  4. May 03, 2017 by Shu

    Update: The winner for the Duplicates Game (Round 2) is A.J. with a number of 55! Congratulations!

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