The Optimal Selling Strategy of Residential Real Estate

Abstract

This paper studies three selling strategies of residential real estate: delegation to a broker, cheap talk with a broker and For Sale By Owner (FSBO). We find that if the state of the market is very uncertain and information of the market is scarce, the seller should hire a broker and delegate the decision right to the broker, even if the broker has no informational advantage. In this case, delegation may induce the broker to over-invest in information acquisition, i.e., more than what the seller would do in FSBO. If the market is certain and information is easily available, FSBO is optimal. Cheap talk, on the other hand, is never optimal, as much information is lost in the cheap-talk communication, weakening the broker’s incentive to acquire information.