Warning: Written in a hurry, and I am very much not an expert. Very open to corrections.

Warning: I am mainly thinking of hot (rising prices, lots of would-be buyers) residential real estate markets within the USA; this post might or might not generalize beyond that.


If you’re selling a home or condo, and want to maximize the sale price, should you list above, below, or right at what you think the fair market value is? This post is my quick list of considerations / lit review.

All things considered, right now I would advocate (1) pricing somewhat below the anticipated sale price; and (2) deferring to realtors, despite their principal-agent-conflict-of-interest and other problems (which I will discuss at length below).

I had the impression (from reading Freakonomics a decade ago) that overpricing leads to higher sale price, but after looking into it, I now think it’s at best a marginal benefit, and more likely counterproductive. But I have considerable uncertainty on that—I don’t think anyone knows for sure. It’s very hard to control for all relevant confounders. Meanwhile, underpricing makes for a faster and easier sale, and that’s worth something too. 

I also, incidentally, saw some evidence in favor of using an overly-precise and rounded-down list price (e.g. $199,900 rather than $200,000), which seems plausible and harmless, so I also would tentatively advocate that too.

Some background information, if you don’t know anything about the residential real estate market

Houses are listed with a list price, which on paper seems like it should be pretty much meaningless: buyers can submit bids above or below the list price, and sellers can accept or reject bids at any price, at their discretion. People do whatever they want! I guess the only concrete function of the list price, beyond pure signaling, is that it would be considered weird and socially unacceptable for buyers to reject an offer at or above the list price for no obvious reason.

Realtors (also called real estate agents or real estate brokers, I don’t know the difference) work with sellers or buyers in exchange for (traditionally in the USA) 2.5-3% of the sale price (each—so 5-6% total). (The USA commissions are unusually high compared to other countries.) The commission structure is decided by the seller, even though that means that the seller effectively decides how much the buyers’ agent is paid. I think that what happens is, all the sellers in a market offer the exact same buyers' realtor commission, thanks to an implicit threat that if they offer any less, buyers' realtors will advise their clients that the house is lousy, or “forget” to mention it at all. Sellers’ realtors will sometimes agree to work for a lower commission, or (what amounts to the same thing) rebate part of their commission back to the seller, and likewise buyers’ realtors may offer to rebate part of their commission to the buyer. However, there’s the usual “lemons” problem that the realtors loudly offering rebates or lower commissions are disproportionately likely to be bad at their jobs. I think the right approach is to try to find the best realtor you can, and then just ask them for a rebate right before the arrangement is final—in a polite way of course, but with an implied threat that you’re still shopping around. Even good realtors are often desperate for customers, as discussed below.

You can also buy and/or sell houses without using realtors at all, which has various disadvantages, including having to figure out how everything works by yourself, and not getting your house into the “MLS listing” if you’re selling, and possibly losing business from people working with realtors, because realtors are an evil cabal who might conspire against people who won't play along and cough up. Just kidding, if any realtors are reading this.

OK, that’s enough introduction, let’s move on to considerations affecting the list price.

Consideration 1: Anchoring

Anchoring says that if you see an ad for House X at List Price Y, almost everyone immediately assumes that Y is kinda the default reasonable guess for what X is worth, with at most minor adjustments for everything you know about House X and the market. Objectively, this is absolutely nuts; out of all the information in the ad—lot size, number of bedrooms, address, etc.—the would-be buyer picks out the one number where the seller can literally write down any number they want, and that's the number that they base their estimate on. Do people really do that??

Yes they do! Anchoring is definitely a thing for real estate sales. The famous experiment, Northcraft and Neale 1987, is here. Researchers made house description packets which were identical except for the list price, and showed it to realtors, and asked the realtors to estimate what the house was worth. The realtors were in fact heavily anchored by the list price, but when asked, they said that the list price had nothing to do with their answers! The researchers did the same experiment on students, who were equally manipulated by the list price, but at least they realized it.

If anchoring were the only consideration, you would substantially overprice your house, and sell below the list price, which is still above market price, while the buyer is deluded into thinking they are a savvy negotiator who got a great deal.

Having said that, in a "hot" seller's market, I don’t think it’s obvious that anchoring is all that important. An underpriced house will attract multiple bids, and in that bidding war, the bidders will be thinking about what they’re willing to pay and what other houses have gone for, in addition to how high they’re going over the list price.

Still, anchoring is a strong theoretical argument for overpricing. It also has indirect effects that distort everything, as we'll see.

Consideration 2: Loss aversion & sunk cost fallacy, for participants in a bidding war

Once a prospective buyer has put in a bid on a house, they have put a lot of time and energy into the idea that they could buy the house and live there. They’ve done their research, they’ve come to terms with the house’s problems, and they’ve gotten excited about its features. Having done all that, if there’s a bidding war, the prospective buyer presumably feels a strong pull to actually win the bidding war, rather than starting over from scratch looking at more houses. This could presumably lead them to bid higher than they would otherwise be willing to. This is a theoretical argument for underpricing.

Consideration 3: Realtor incentives and feedback all push towards underpricing

What happens if a realtor underprices a house they’re helping sell?

  • The house sells quickly.
    • The realtor can get back to acquiring new clients and selling more houses.
    • There is less chance that the sellers will change their mind and decide not to sell after all.
  • It is likelier for there to be a bidding war.
    • The buyers compete not only on price, but also on other ways to make the sale process pleasant for the seller (fast closing, all-cash offers, waive inspection, etc.)
    • … And the seller therefore has an easy and pleasant selling experience, and they thank the realtor profusely, and recommend the realtor to all their friends.
  • The house sells well above list price.
    • The sellers, thanks to anchoring, confuse "above list price" with "above market price", and are therefore delighted at the skill of the realtor in advertising and showing the house.
    • The realtor's coworkers and potential future clients also get confused for the same reason, and likewise shower the realtor with praise and business for a job well done.
    • Even the realtor themself probably winds up judging their own success relative to the list price, and remembers the sale as wildly lucrative for the seller!
  • If the house sells for less money, the realtor gets a smaller commission. ...But this is a tiny effect compared to everything else mentioned above!
    • For example, selling a house for $190,000 instead of $200,000 is a big deal for the homeowner, who is now roughly $10,000 poorer, but it is almost trivial for the realtor—equivalent to just a few hours' salary!
    • Realtors' career success is entirely based on their ability to acquire lots of rich customers. Maximizing sale price has almost no direct effect.
    • (I hear that in commercial real estate, agents working with a seller may work on a commission scheme where they get a much higher fraction of the selling price above a certain baseline, which seems like a very sensible way to better align incentives. For example, US residential real estate sales commissions are typically 2.5% × (sale price). What I’m talking about might be instead a commission of 50% × ((sale price) - baseline), or something like that.)

So, realtors are strongly incentivized to underprice. This is not only a principal-agent problem, but also a distorted-vision-of-reality problem—at least, it’s distorted from the perspective of a seller trying to maximize sale price. If overpricing actually led to higher sale price (for the sake of argument), I think that not only would realtors advocate underpricing anyway, but they would have no idea that they were doing this at the expense of sale price.

(Well, I expect that some highly analytical and fastidious realtors wind up actually knowing the truth about whether overpricing or underpricing leads to higher sale price. These are the kind of people who keep a database of their own price recommendations and predictions, pre-registered to avoid the distortions of hindsight bias, and gather enough data to average out the randomness, etc. I just suspect that this is a tiny minority of the total.)

Incidentally, despite the incentive of realtors to underprice, this study finds that people list their houses for more-or-less the same price whether or not they use a realtor, after controlling for confounders.

Consideration 4: Advantages and disadvantages of a house sitting on the market for a while

Suppose a would-be home buyer sees a house that has been sitting on the market for a long time, in a “hot” market where most houses sell immediately. There are two possible conclusions: (1) The house was listed for too high a price, or (2) There is something wrong with the house that is not apparent from the listing. My impression is that almost everyone immediately assumes (2). Why? You guessed it: anchoring distorts everything. As above, when people see a list price written down next to a description of a house, that anchors the idea that the list price is more-or-less appropriate for a house with that description. And therefore, if the house is not selling, then the description must be omitting negative details.

This is an argument against overpricing, since overpriced houses are more likely to not sell immediately, which then taints their reputation and makes them sell for less than they otherwise would.

On the other hand, the pool of potential buyers is not exactly the same every week: every week, new people start their house search. Your house may be exactly what some particular buyer is looking for, and that is an argument for letting the house sit on the market until that particular buyer appears on the scene. This is an argument for overpricing.

There are other obvious considerations. You might want to sell the house fast because having a house for sale can consume time and money. (You might be paying interest on some debt that the sale will pay off; you might need to keep mowing the lawn and fielding questions from would-be buyers and paying taxes and insurance, etc. etc.) If the market is going up, you would be in less of a hurry to sell, and if it’s going down, more of a hurry. Etc.

Study 1: A Homeowner’s Dilemma: Anchoring in Residential Real Estate Transactions

(the tables are not included in the free PDF. The paywalled version is DOI:10.1016/j.jebo.2013.01.010)

It is difficult to disentangle the possibility that overpricing a home leads to higher sale price, from the possibility that better homes are listed for more money, and also sell for more. The authors here control for easily-quantified information (floor space, number of bedrooms, etc.), but they cannot control for “unobserved” factors. Well, they do control for constant-in-time “unobserved” effects by comparing multiple sales of the same home. But they can’t control for non-constant-in-time “unobserved” factors, which intuitively I would think to be awfully important. It’s not like two consecutive owners of a house take equally good care of it!! The authors have some arguments that unobserved factors are not important. I don't understand these arguments, or maybe I disagree with them.

Even if we take the study at face value, the conclusion is: “over-pricing between 10 to 20 percent leads to an increase in the sale price of $117 to $163” (something like 0.05-0.07% of the sale price of their sample). You can make your own decision about the tradeoff between 0.07% higher sale price, versus an increased risk that the sale will be much more of a time-consuming headache. For me, I'd give up the 0.07%. Moreover, I think that 0.07% is an overestimate, and the real number could even be negative. First, when there is a bidding war for an underpriced house, the bidders may compete on other dimensions besides home price, including waiving home inspections, all-cash offers, etc. These inducements are plausibly worth much more than $163 in expectation; they can lead to reduced closing costs, and/or reduced risk of the sale falling through (which in turn leads to the house going back on the market, which is time-consuming and tends to reduce the ultimate sale price because it looks bad, as mentioned above). Second, the sign of the confounders is such that they exaggerate the benefits of overpricing. So if the authors partially controlled for confounders but not completely—which I expect to be the case!—the real benefit of overpricing would be less (and, again, possibly negative).

There is also a weird claim in the study that “although realtors recommend underpricing, they believe that homes listed lower than comparable properties tend to sell for lower prices and homes listed higher than comparable homes sell for higher prices”, based on a little survey they did (in addition to the main observational study discussed above on sale prices) where they asked realtors to read listings and guess the list and sale price. I don’t believe that claim I quoted: I don't think realtors really believe that, for reasons stated above. And I don’t believe that their little survey provides evidence for that claim. Instead, I think the survey results are polluted to uselessness by uncontrolled confounders. Indeed, the obvious explanation for the survey results is that each realtor has idiosyncratic views about what properties are desirable, and that they put both a high list price and a high sale price on those properties. The authors didn’t (and couldn’t!) control for this; they only controlled for house characteristics that were consistent across realtors, and for realtor characteristics that were consistent across houses. So, those results are pretty much worthless in my opinion, unless I’m misunderstanding it.

Study 2: Realtors list their own places for a higher list price, leave them on the market longer, and get a higher sale price

This was in Freakonomics—excerpt here, and the original study is here. The paper explains the finding in terms of the principal-agent problem—as discussed above, realtors have an incentive to underprice other people’s homes, to make the sale faster and more certain and pleasant. When they sell their own home (the story goes), they put a higher list price because they care more about maximizing sale price. I’m skeptical. For the reasons above, I think that when realtors tell you to underprice and sell fast for the best final price, they are not being disingenuous, they are relaying their sincere belief based on their own lived experience.

So why on earth would they leave their houses on the market longer? I think it’s because, on average, they tend to overprice (or underprice less) by accident! And how would they do that? Well think about it: they sell house after house where they have to compromise with stubborn homeowners, work in a hurry, etc. Finally they are selling their own place and can go all out! They can do everything perfectly! I think they just get a bit overconfident about their own power over the situation. I mean, I’m sure that a lot of the things they try do indeed help get them an above-market sale price. But maybe they don’t help quite as much as the realtors expect. Maybe some of the realtors’ great ideas for increasing the sale price are actually just their own superstitions! So the realtors underprice compared to their expectations, yet actually overprice compared to the market value (which in turn is higher than the market value of otherwise-comparable houses that are not so exquisitely presented and advertised).

To be clear, I’m just speculating.

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5 comments, sorted by Click to highlight new comments since: Today at 12:45 PM

As someone who just sold a house and is currently trying to buy one, I found this pretty interesting. We've lost two bidding wars where houses listed ~$5k under what they're worth sold for (my opinion) ~$10k over what they're worth. We're also considering making an offer at $10k under list price for a house that's probably listed $5k over what it's worth and has been on the market for a comparative eternity.

Regarding the Stanford study:

We find no evidence that the use of a broker leads to higher average selling prices, or that it significantly alters average initial asking prices. However, those who use brokers sell their houses more quickly.

This makes sense, because unless sellers are systematically underpricing houses (the opposite of the direction I'd expect), they don't actually control the sale price, and the realtor on the sellers' side is there to help the seller find the market price faster (which they appear to do).

Some other confounders with realtors selling their own houses are:

  • They probably have more expensive houses than the average (since they have high incomes)
  • I suspect they're more likely to have house features that are underappreciated by (most of) the market, like well-maintained roofs

If you combine expensive houses with hard to market features, you get houses that sell for more but sell slower. The more-expensive-house hypothesis seems like something you could control for, but it would be hard to control for the second without extremely detailed (sometimes subjective) information about the houses.

weird and socially unacceptable for buyers to reject an offer at or above the list price for no obvious reason.

In some jurisdictions, it's legally required to accept an offer at or above the listed price, unless it fails to meet one of the approved reasons (mostly about reliability or timing of financing). I don't know if any have gone so far as to make it fully fixed-price (must accept the earliest qualified offer at exactly the listed price), but I presume that'll happen to further reduce immoral dimensions of discrimination.

I think it’s because, on average, they tend to overprice (or underprice less) by accident!

I doubt that. I think some of your reasons are valid (don't have to work with picky homeowners as long when they're the homeowner, much easier to coordinate showings and such, etc.). But I think the Freakonomics explanation (they care more about money than time in this case, and they care about money divided by time for their paid work) carries a lot of weight. And I think that the time preference of the owner is likely different. Most homeowners prefer a quick sale, where realtors understand that timing doesn't matter that much, so are more patient.

I am mainly thinking of hot (rising prices, lots of would-be buyers) residential real estate markets within the USA

In those situations, I think your null hypothesis (it won't matter much) is pretty close to correct. Assuming the market is deep enough that there are multiple buyers who'd be happy at the top end of a given price range, it doesn't matter very much where in that range you start. Anchoring matters, but only a little - stronger anchors already exist in the minds of the buyers, in the form of budget analysis and comparable nearby sales.

EDIT: even though I think that asking price (within reasonable bounds) doesn't have much effect, I _do_ think there are other dimensions of buyer irrationality that a seller should pay attention to. Specifically, cosmetic repairs and staging can have an outsized impact. Spending a tenth of a percent of the selling price to make it trivial for a buyer to picture themselves in a pleasant, worry-free, high-status living arrangement can make much bigger differences than it costs.

Are you under time pressure? If not, would the following strategy be possible?

  • overprice a lot;
  • if it doesn't sell, withdraw from the market and wait for a few months, so that the buyers forget about you;
  • try again, now with a lower price, but still overpriced.

The idea is that if there is a chance to sell at the higher price, that will probably be the most easily made money you ever got. Also, not sure whether the buyers can identify that it is the same house in both cases; if they can not, then you are possibly creating a mistaken impression of "there was a similar house in the same location in the past, it was more expensive, and apparently it sold (because it disappeared from the listings)".

Ha! I love it! But I don't think it would work. At least where I am, everyone uses Redfin and similar which make it very transparent which listings were removed due to a sale and which were removed without a sale (sales are a matter of public record), and you can immediately see all the previous listings associated with a given property and how they turned out.

And I'm not convinced that listing high is a benefit anyway. It might sell for an even higher price if you list low, with people bidding above the list price (e.g. in a bidding war)