The main reason why you shouldn't overprice your home is simple, IT WON"T SELL. In addition to it not selling, it makes it more difficult to sell it for what it would have sold for if you had priced it right to begin with. I hear over and over that it is about marketing to someone who won't care about the price and in my experience, no amount of marketing can sell an overpriced home.
Selling a home can be an emotional rollercoaster that many people are not prepared for. Most everyone loves their home and most everyone thinks their home is better than their neighbor's. This is very apparent in the pricing process.
When you put your home on the market, you are doing it to sell it, right?? Sometimes this point is missed by sellers. At the end of the day, a home is only worth what someone is willing to pay. This is where finding a real estate agent who is truly knowledgeable about your local market is key. It doesn't matter what you paid for the home, it doesn't matter what you need to get out of it to buy another home and it doesn't matter what a house in your neighborhood sold for 10 years ago or what the appraiser said your house was worth 4 years ago. Buyers don't care, end of story. A buyer cares whether or not they are getting your home for a fair market price.
Overpricing a home is most often the #1 reason a home did not sell. And with today's market, the longer your home is on the market overpriced, the more it grows stale. I have seen overpriced homes have a market history years long on sites like Zillow and Trulia. This has a negative effect on selling your home, even when you decide to price it correctly.
A good agent will tell you honestly if your home is priced high and there are other agents who will tell you what you want to hear. One of the #1 mistakes a home seller makes when listing their home is choosing a Real Estate agent based on the suggested list price they give.
Why not overprice? Or just "test" the market?
First of all you will scare off buyers before they even have a chance to look at your house. Many buyers and a lot of agents will not look/show a home that is overpriced. People want a fair deal.
Secondly, it will take a loooooonnnnnnggggg time to sell, if it sells. Overpricing a home causes the days on market to be high and leads to expired listings, data that follows your listing and shows to potential buyers. It often makes buyers question what is wrong with the home, even after it comes down to a reasonable asking price. In real estate, time is the enemy.... Buyers will almost always ask "How long has the house been on the market?" If it has been on the market a long time, buyers will low ball, if they even offer or look at the house to begin with. The sooner you can get an offer on the house, the better, that is why correct pricing is so very important in the beginning.
Third, it doesn't show up when people search for homes. For example, if a realistic list price for your home is $385,000 and you price it at $459,000, it won't show up when buyers and agents search only up to $400,000. Pricing your home within the range of comparable sells will allow your home to be seen by buyers and agents who are searching for homes similar to yours.
Next, appraisal issues. Let's just say you get lucky and someone bites on your overpriced home. Most likely, they are going to get a loan. And if they get a loan, the bank will want an appraisal. The apprasier does not care how great you think your house is or that you spent $30,000 on a kitchen remodel. The market controls the comps that the appraiser uses and your home will be appraised accordingly. What happens when a home doesn't appraise? The buyer either asks for a price reduction and you agree and/or the deal falls through.
The moral of the story is to be realistic in your expectations. Listen to your Real Estate agent and make sure she or he is knowledgable about your market. DO NOT choose an agent based on price alone!!! Most of real estate marketing is based on the price of your home, so price it right or risk not selling it at all.