Consider the following scenario.
You list your home for $395,000, knowing full-well you'll take $350,000. But you want to "leave room for negotiation" since everyone knows buyers will want to negotiate. Four months later, 25 to 30 buyers have traipsed through your home, left very little feedback ("not the right layout, thanks!"), and you've received no offers. You call me because you're considering changing brokers. During our meeting, I recommend that you reduce your asking price to $359,000 or perhaps $355,000. Then you ask me the most notorious question of them all, "Jeff, why would I reduce the price? No one has commented that my home is over priced. Heck, no one has even made me a low offer?"
I've typically answered that question by saying something like, "The buyers have been telling you your home is overpriced, you just haven't been listening. Being on the market for 4 months with no offers screams that your home is overpriced for the location and condition it is in." I would wager that only 50% of the people I've told this to actually believe this line of reasoning. Why isn't it as effective as I'd like? Because it sounds like a sales pitch brokers have been trained to give sellers after 30 days, then 60 days, then 90 days, etc. But it's the truth.
And then I read this article titled "5 Tips Buyers Would Give Sellers If They Could," and I really liked this broker/attorney's answer to the very question posed above. I plan on using her (edited) answer below from now on.
"You might be thinking the best plan of action is to list your home high, planning on the fact that prospective buyers will want to bargain the price down, and it is true that most buyers expect to engage in some basic negotiation. They are not, however, interested in correcting your belief system about your home and its value, which are clearly not based in reality. Buyers invest a lot of time, energy and emotion in making an offer on a home. So, if your list price is so bizarrely above market value that the chances of coming to a meeting of the minds on the price are slim, the buyer will simply pass and move on to the next home without giving your home a second thought.
If your home is dramatically overpriced compared to the others in the area, most serious home buyers in the market for a home like yours will either (a) never come see it, because it doesn’t show up in the price range they are searching online, or (b) not come see it unless and until you drop the price, because it simply isn’t worth their time and energy until you correct your pricing into the realm of the realistic."