Chocolate and Gold Coins

Saturday, February 26, 2005

Buying Property in Bulk part 2

I thought about my previous post on Buying Property in Bulk and decided that I did not entirely like the 10% punishment mechanism that I outlined. I thought about how that game would proceed and I realized that I was wrong that it had the virtue of forcing people to reveal their true valuations for their property. In practice, people would discuss among themselves what markup each would ask for. If most said “I think I will ask for 10% more than my estimated house price,” then others will think “if I ask for less than 10%, I will be giving away money, and if I ask for more than 10%, I might get punished.” Therefore, a rather arbitrary number will become the focal point of the game, (a focal point is a strategy in a game that is important for no other reason than because everybody thinks its important).

Also, I did not like the fact that 10% of the players had to be “punished,” albeit mildly. I think most people would say that everybody ought to get the same markup regardless of their own valuations. So I propose another mechanism: the 90% consent mechanism.

The 90% consent mechanism

The 90% consent mechanism would proceed as follows:

  1. The real estate developer would go around to homes and propose the mechanism for acquiring their land en lieu of acquiring via eminent domain. He hopes the people agree.
  2. An independent home price estimator estimates the price of each home.
  3. The real estate developer announces the markup that he will be willing to pay. Everybody gets the same markup.
  4. All of the homeowners then vote to approve or disapprove the resulting deal. Ninety percent or more must support the deal for the homeowners to collectively approve the deal.

A variant of this game would be to have a third party broker the deal between the homeowners and all possible real estate developers. The land would be auctioned off to the highest bidder conditional on the approval of the homeowners. Given the sales price and the estimated valuations, we can figure out the markups. Then 90% would have to approve the deal, as before.

The virtue of the 90% mechanism is that it respects private property rights in the sense that a small minority of the homeowners can disapprove the deal if they feel that their rights are violated. The 90% rule also force the real estate developer to pay a fair market value for the real estate, because certainly more than 10% will disapprove if they feel that the real estate developer is low-balling the price. In addition, this mechanism is fair since everyone gets the same markup.

I like the version of the mechanism in which there is a broker. Maybe I should be the broker since I thought up the mechanism. I would charge a very small brokerage fee, perhaps 1% of sales. If the deal is more than a billion dollars, I will only charge 0.5%, (I’m not greedy).


  • I don't know who can buy the property in such hard times. Only if they can get a direct lender payday loan of course because in other way no one can accumulate money for it. Real estate is too expensive today.

    By Blogger Unknown, at 4:15 PM  

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