The common wisdom in the real estate world holds that precise, compared with round, asking prices lead to counteroffers and final agreements that are closer to the asking price. Consequently, popular advice for sellers is to set precise asking prices. The researchers found that that this advice holds true, but only in a buyer’s market, in which prospective purchasers counter below the asking price. In a seller’s market, in which buyers counter above the asking price, sellers can receive higher counteroffers and sell for higher prices by setting round asking prices.
The researchers, from the UvA’s Faculty of Economics and Business and the VU’s Faculty of Social Sciences, first conducted a pre-registered experiment with 1,809 US-based participants, asking them to provide counteroffers to properties advertised with various asking prices. They found that precise prices led to higher counteroffers in a buyer’s market but to lower counteroffers in a seller’s market. The effect was driven by buyers’ use of a finer-grained pricing scale when countering precise asking prices.
‘Buyers counter precise asking prices with precise counteroffers and round asking prices with rounder counteroffers,’ explains lead author, Margarita Leib. ‘These effects were found for both people with and without experience of buying or selling real estate. The effect thus seems like a basic psychological mechanism of how people react to round versus precise numbers.’
Amsterdam’s housing market
The researchers subsequently assessed Amsterdam’s 2017 real estate data (8,278 listings in total) provided by NVM (Nederlandse Vereniging van Makelaars en Taxateurs), the largest Dutch association of real estate agents. The housing market in Amsterdam in 2017 was a perfect situation to test whether the experimental results translated to effects outside the lab, because over 70% of the properties were sold above the asking price, a clear seller’s market. Co-author Marc Francke, professor of Real Estate Valuation at the UvA’s Amsterdam Business School: ‘Countering above the asking price was so common in 2017 that real estate agents in Amsterdam began referring to asking prices as “minimum prices”’. Results revealed that increasing the roundness of the asking price by one decimal, for instance, from precise to the thousands (e.g., 249,000) to precise to the tens of thousands (e.g., 250,000), was associated with an increase of 0.6% in the selling price, equivalent to €2,099 on average.
Leib: ‘An open question however, is whether sellers were strategically calibrating their asking prices by balancing how round and how high those prices should be. This is something we want to look into next. Regardless, whether buying or selling a real estate property in Amsterdam or elsewhere, knowing about the impact of the zeros at the end of asking prices could prove extremely valuable.’
From the lab to the field
Co-author Dr Marieke Roskes: ‘There is a lot of discussion about whether, and to what extent, lab experiments can inform our practical knowledge about issues that matter to society. We were very pleased to see that the effects we found in the lab translated to clear and predictable effects outside the lab. The size of the effect was meaningful. When you sell your apartment, an extra €2,099 is not a negligible amount for simply making the last digit of the asking price a zero.’
M. Leib, N. Köbis, M. Francke, S. Shalvi, & M. Roskes. Precision in a Seller’s Market: Round Asking Prices Lead to Higher Counteroffers and Selling Prices. Management Science, in press.