I hate to say it, but some of you agents are soft!
I see a fair number of homes that are up for sale in my travels, and I have to say that some of you listing agents out there are not educating your sellers on what it means to be competitive!  I know it is hard to tell your sellers that they need to maintain or even update their house if they want it to sell, but sometimes the truth hurts.  This goes beyond the simple tired paint that is the most common, and I am speaking to you agents out there with homes that have worn out counter tops, randomly sprinkled gold tone fixtures or lighting, original shag carpeting, and failed caulking or grout in the shower and tub.  We won't even go into the landscaping...

Be honest with your sellers about what needs to be done to impress buyers!
Yes, they might bristle when you tell them their house, as it sits, just plain sucks.  You know that is what buyers will think when they walk through the door.  If you are really wanting to not feel the heat, or just can't bear to break the news to them that their 'lovely' house is really a pit, then make it part of the listing agreement that a home stager will need to come in and make some changes and recommendations.  Then at least they won't hate you (at least as much.)

What is the worst that can happen?
You might be worried that if you are honest with them, that they will hate you and not let you sell their home.  Lets consider this against the fact that if you do list their 'lived in' property (at top of the market price of course) it will most likely sit there and ferment on the market.  15, 30, 90 days in they will start to blame you for their home not selling.  You know how this story goes.  Now nothing you want to suggest is right, and there is little that you can do to salvage the listing and the clients.  So you spend time, energy and money just to have a listing that doesn't sell and clients that loathe your name.  Sounds fun doesn't it?

Be honest, get it fixed and get it sold!
Be honest with them, get the property in good enough shape to compete with the other homes on the market.  You know it doesn't have to be perfect, but buyers have to not snicker when they walk in, or worse yet, when they drive by.  In most cases the sellers will recoup the added expense of having the home polished a bit at closing time, either in actual sale price or in saved payments because the property didn't sit for a year before selling.  In the end your clients really just want their property sold, and will forget all about your initial comments about the condition of their property just about the time the sign the closing papers.

Be brave, you can do it!