How much profit should I price in to an asking price?

[Thomas Dulaney]

My wife and I have a house in La Puente, California. We recently had it appraised for $475. This price, I'm told, includes factors such as it's current condition. (Zillow's Zestimate is $569k, but I have no idea how accurate that is.)  It's livable (we've had renters in it for about a decade), but it does need some work to get the best price, which is what flipping is all about, right?

We initially priced the house at a 40k discount from the appraisal (which, if you believe Zillow is $134k below what it will sell for once flipped). The real estate agents suggested pricing it low to "create a frenzy". (Ha!) Within the first week, we got two, identical cash offers for $400k. We countered to split the difference, but neither budged.

So, now I'm confused. Is my appraisal really that far off (is the Zesteimate?) or is this just part of the game? The property behind ours is bank owned and I've heard they're open to a short sale. (I think I got that from the agent representing that house. THAT house is probably a teardown.) Am I wrong to think this should make things more attractive? In theory, someone could buy both lots, tear them down and put up a triplex or fourplex. (Our lot is unusually large, 9800 sqft, and when you combine both, you have over 1/3 acre. Is that enough for a triplex/fourplex or is that really not even an option here?)

We live in Virginia, so our flipping the property ourselves is out of the question. Is it crazy to think that 40k discount off of the appraised value is fair, given that the improved price is could be as much as $600k for a house this size in Los Angeles or have I let the flipping shows cloud my vision of reality? The fact that two independent developers have settled on exactly the same price has me thinking that perhaps there's something I'm missing about this equation. 

For reference, there's a house a few blocks away priced EXACTLY them same, but is 1300 square feet smaller and sits on a lot that is 3500 square feet smaller. It might or might not be in better condition, but seriously... our house is not in need of being condemned, its just been a rental for a while. There's a house that only slightly smaller within a few blocks that sold for $545k, so the Zestimate can't be THAT far off... can it?

Any and all advice is greatly appreciated!

Best regards,

  --Tom