The Psychology Driving Real Estate Pricing and Negotiations

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One of the toughest decisions when selling a home is deciding upon the optimal listing price. The Journal of Economic Psychology examines a study that was conducted to identify how different types of listing strategies affect house pricing negotiations. Previous studies conducted by other economists suggest while listing strategies may influence the selling process, it does not directly translate. This is because, unlike marketable consumer goods, the list price of a property generally acts as a starting point of negotiations. Therefore, the study discussed in the Journal of Economic Psychology is an extension on existing research, and goes on to investigate the effects and negotiated outcomes of listing strategies. The psychology behind real estate pricing is a vital factor for agents or regular home owners to be mindful of.
For the purpose of the study three different types of pricing strategies were examined: rounded (where the thousands digit is either 0 or 5), just below (where the thousands digit is either 4 or 9) and precise (where the thousand digit is either 1, 2, 3, 6, 7, or 8). Although a slight difference between 5 or 4 thousand does not seem like much, it plays a big role in the psychology of negotiation. Below are some of the key findings:
  •     From the seller’s perspective higher precise pricing (numbers higher on the spectrum) often lead to the highest final price and the lowest negotiated discount in comparison to just below pricing.
  •         On the other hand, sellers are greatly impacted by high precise and just below pricing strategies when it comes to making the first counter-offer. They were seen offering more just below counter-offers when the listing is priced just below, and make high precise offers when the list price is precise. It would seems as though sellers are influenced by their own strategies they employ on the other end of the deal.
  •         Lastly, on the contrary to popular belief high precise leaded to a higher sales price compared to low precise pricing. This notation dispels the benefits of under-quoting.  

Buying or selling a house is always a significant financial transaction. Considering high prices of properties, just a small percentage change in the final sales prices can result into a sizable dollar amount. Therefore it is important not only to study the economics of what effects market prices but also the psychology behind buying and selling.
                              


Taken from a journal article written by Eric Cardella and Michael J. Seiler.
http://www.sciencedirect.com.subzero.lib.uoguelph.ca/science/article/pii/S0167487015001361?np=y

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