Warren Agency, Inc.
Mr. Thaddeus Warren operates a real estate agency, which specializes in finding buyers for commercial properties. One day, Mr. Warren is approached by a prospective client who has three properties in and adjoining Cambridge, Massachusetts, which he wishes to sell. The client indicates the prices he wishes to receive for these properties as follows: Allston: $25,000, Belmont: $50,000, Cambridge: $100,000
Warren would receive a commission of 4 percent on any of the properties he is able to sell.
The client lays down the following conditions for an exclusive listing: “Warren, you have to sell the Allston property first. If you can’t sell it within a month, the entire deal is off—no commission and no chance to sell the other properties. If you sell the Allston property within a month, then I’ll give you the commission for Allston and the option of (a) stopping at this point, or (b) trying to sell either the Belmont or Cambridge properties next under the same conditions (i.e., sell within a month or no commission on the second property and no chance to sell the third).”
After the client leaves, Warren proceeds to analyze the proposal to determine whether or not to accept it. He figures his selling costs and his chances of selling each property to be:
Warren’s assessment of
Property Costprobability of sale
Allston (A) $8000.7
Belmont (B) $2000.6
Cambridge (C) $4000.5
Should Mr. Warren accept this deal? Why?