When my husband and I bought our first house 22 years ago, that was the "rule of thumb" that well-meaning people told us. Times have changed. In our market, houses are typically selling at 90-94% of the listing price. Offers 20% or 30% below asking are not in any way considered reasonable. The seller will not see you as a serious buyer, one acting in good faith.
In MA, we have buyer representation, if you chose to make use of it. Remember that if you don't, the agent IS working for the seller. The seller already has agreed in the listing contract that part of the commission he is paying at closing will be split with whoever brings the buyer. If the buyer has a buyer agent working for her, the agent's fee if nearly always paid by the seller. A buyer agent is likely to ultimately save you a great deal of time and money.
Your buyer agent will do many things for you, including helping you determine and prioritize your needs and wants, search for properties that will meet your needs, set up appointments to see the properties, research to find answers to your questions, and refer you to professionals such as lenders, home inspectors, tradespeople, and attorneys. The biggest way a buyer agent helps you get the best possible price and terms, however, is to prepare a Comparative Market Analysis (CMA) of any property upon which you wish to make an offer. The document is just like the one prepared for the seller when they list their home for sale. The agent looks for recent sales of the most similar homes possible - In our market we have no "cookie cutter" developments, so it is a bit like comparing apples and oranges. The experienced agent will adjust the prices of the comparables to allow for such differences as square footage, number of baths or bedrooms, lot size, whether or not there is is a garage, etc. The buyer is shown what the property is likely to sell for in a reasonable marketing time. This is different from an appraisal, prepared by a licenced appraiser. The agent relies on what he/she is seeing in the market place - what values his/her buyers are placing on the differences.
What do you do with these numbers? You use them as reasonable boundaries. You can compare them to the listing price to see if your seller has a realistic view of what the house is going to sell for. If there is a "recommended price", it represents fair market value of a property that has been on the market a reasonable period of time (here, roughly 6-8 months) and the seller is reasonably motivated, but not desperate. It is reasonable to predict the final selling price will be close to that number. If there is a "low" figure also given, that is a "desperation" sale price. Do not expect that the property will sell at that price unless it is a foreclosure (We have VERY few of those here in the Berkshires!) or a court ordered sale,as in the case of a divorce or lawsuit settlement. If there is a "high" price, and the seller is not very motivated, (such as one of our many second home owners), the seller may wait out the market to get a figure closer to this number, and can expect to do so if he is willing to wait a very long time...in some cases 2-3 years.
If you offer too low of a price, the seller may well be so insulted that he will not even respond, or will respond by digging in his heels and be unwilling to negotiate with you. He figures you are "low-balling", so his response will be equally unreasonable. The closer to that recommended price you offer, the more likely the seller will see your offer as reasonable, and the more willing he may be to respond favorably to negotiations, including to any requests you might have to later make for adjustments for inspection issues. Offering more than recommended may be necessary if the property were well priced and there are competing offers - Yes, even in this market that is happening - I've had two such situations in the past two weeks!
Notice that I am NOT refering to the listing price here, only the numbers from the CMA. A flat percentage off of the listing price is a knee-jerk reaction that means little. If your are offering close to the recommended price, and it is significantly different from the listing price, it may be wise to have your agent provide the listing agent with a copy of your CMA so he can show the seller where the offer is coming from. The lisitng agent may well have been trying to get the seller to price at this level to begin with, and can use the CMA to gently tell his client "I told you so", and work to help the seller understand what is a reasonable offer for his property.
As always, working with an experienced LOCAL professional, a member of the National Association of Realtors, is recommnended. On-line data in interesting, but local agents will have first hand knowledge about the local market and what truly affects local property values. The resource is free to you - why not use it to your advantage?