Dutch Auction in Denver: A Newsworthy Real Estate Technique
Recently, my family sold our home and moved. To sell our house, we used the standard technique of considering bids as they came in and negotiating. What made selling our house more difficult was the attraction of the house down the street, which was using an ascending (English) auction method with a starting point just low enough to steal attention from our house.
An even less conventional house-selling technique was featured in the news today.
According to CBS Denver, this “dream house” will go to the “lowest bidder”. This phrase provokes thoughts of betting the lowest amount of money, $0, to acquire such a house. However, this house is being auctioned through a descending (Dutch) auction technique. The house is starting at $4 million. Each day, the price will drop $150,000 until it sells. The seller can accept or reject any bid, and stop the auction at any time. This auction technique leaves the bidders blind to the ongoings of the other auction participants, as every day the bidders’ new information consists of the updated price and whether or not the house has been purchased or not. In this way it is similar to a first-price sealed bid auction in that the highest bid is the winning bid and no one can gauge information beyond that.
So if you’re looking for a luxury home in gorgeous Colorado for a good deal, consider this strategy. Consider the buyer’s assessed value of the house as V. Losing the auction would yield a profit of 0. Winning the auction would yield a profit of V minus the price the buyer paid for it; if the buyer bids at V, the profit ends up being 0 (although admittedly you are also the proud owner of a sweet house). The optimal strategy would to be to bid slightly below V. The amount to bid below V would depend on several factors, including but not limited to: how badly you want the house and how that translates into a more conservative/risky bid, external information about competitive bidders, external information on the seller and the minimum price they would offer before closing, etc.
Auctions certainly attract attention since there is the opportunity for significant profit if other factors are in your favor. However, despite the large amount of attention the house on my street got, the auction was ultimately not successful, as no one wanted to bid much more above the starting price (a dominant strategy since that’s where it was valued) and the sellers wanted a little over 30% above the starting price.
This Colorado house look amazing, though, so perhaps this Dutch auction will work out for everyone involved!
http://denver.cbslocal.com/2015/09/16/reverse-auction-to-give-luxury-home-to-lowest-bidder/