New research explores the power of price “anchoring” when buyers look at real estate.

SANETTE TANAKA

“The Price Is Right” isn’t just a game show. It is a mental strategy real-estate agents use to get the most money when listing a home.

When setting an asking price, there are two schools of thought: In one, agents overprice properties in the belief that a higher asking price will draw higher initial offers from potential buyers.

Wendy Jodel, associate broker with Town Residential in New York City, says overpricing works when inventory is low. Ms. Jodel recently listed a two-bedroom apartment on Manhattan’s Upper East Side for $1.35 million—4.5% above the price of similar apartments nearby. “I had no competition,” she says, adding that few comparable apartments are available in the area. The apartment closed this week with multiple offers for $1.32 million.

Name Your Price

Sellers who listed their homes…

…10% to 20% higher than other homes in the neighborhood saw a slight increase of 0.05% to 0.07%, on average, in the sale price.

…10% to 20% lower than other homes in the neighborhood saw a slight decrease of 0.5% to 0.8% in the sale price.

In 10 sample listings, real-estate agents recommended underpricing homes at a frequency of 70.4%.

Source: Journal of Economic Behavior & Organization, May

Other real-estate agents take the opposite approach, pricing homes below nearby properties in hopes of starting a bidding war. Chris McDonnell, senior associate broker with Coldwell Banker Distinctive Properties in Vail, Colo., says he prefers to underprice homes by 5% to 10%. Now, even in a heated market, buyers are looking for a bargain, he says. If sellers start low, they could potentially add 10% to 15% to the sale price. “There’s so much pent-up demand out there right now. Money is just waiting on the sidelines,” he says.

This strategy, however, poses a challenge: “It’s really hard to get your seller to agree to that,” Mr. McDonnell says.

New research tackles this dilemma. A study published in the Journal of Economic Behavior & Organization in May found that homeowners who set the initial asking price 10% to 20% higher than similar houses in the neighborhood see a slight increase of $117 to $163, on average, in their sale price. Pricing a home 20% or more than similar houses leads to an impact three to four times as big.

Pricing a home 10% to 20% lower than homes in the neighborhood leads to a decrease of $117 to $187, on average, in the home’s sale price.

The research explores a behavioral trait called “anchoring.” That is a common tendency to rely on the first piece of information offered (the “anchor”) when making decisions. Once buyers have an anchor, they typically interpret other information involved in the sale around it.

“Every house is different, and so those qualitative things really matter. Buyers will turn to the good attributes that justify the high price,” says Grace Bucchianeri, former assistant professor at the Wharton School of the University of Pennsylvania.

Prof. Bucchianeri and co-author Julia Minson, a lecturer at the University of Pennsylvania at the time, analyzed 14,616 real-estate transactions in Delaware, New Jersey and Pennsylvania between January 2005 and April 2009 with an average sale price of $234,000.

The study, “A homeowner’s dilemma: Anchoring in residential real estate transactions” found that “overwhelmingly anchoring is a good strategy,” Prof. Bucchianeri says.

In the same study, researchers found that while agents privately believe that overpricing leads to a higher final sale, they publicly advocate underpricing. In this study, 35 agents were shown 10 sample properties between March 28, 2011, and May 2, 2011, and asked to recommend a listing price. In 70.4% of the properties viewed, agents recommended underpricing.

They had a “strong belief that listing low was the only way to go,” Prof. Bucchianeri says. “‘If you list it too high, you would never sell your house,’ they thought.”

Pricing low may speed up the sale, which can save the real-estate agent both time and money spent marketing the property. In the end, agents may get a lower commission, but the difference is usually negligible. “It’s intuitive if you think about it,” she says. “It looks like the realtors are doing what’s best for them, and as homeowners, we need to understand that relationship.”

Write to Sanette Tanaka at sanette.tanaka@wsj.com

via Should Home Sellers Overprice or Underprice Real-Estate Listings? – WSJ.com.