If I recall correctly, Diamond Lake has an 800gp limit or something. So if the PC's want to sell off, say, Theldrick's suit of full plate +1 because no-one wants to wear it (rogue and sorceror just laughed, druid shrugged and said 'not me' and the fighter is going for a lighter build out), are they going to have to hang on to it until they can spare a week to go to the free city or risk stashing it somewhere?
If I recall correctly, Diamond Lake has an 800gp limit or something. So if the PC's want to sell off, say, Theldrick's suit of full plate +1 because no-one wants to wear it (rogue and sorceror just laughed, druid shrugged and said 'not me' and the fighter is going for a lighter build out), are they going to have to hang on to it until they can spare a week to go to the free city or risk stashing it somewhere?
In the end I'd say that this would be up to the DM to decide, based off of how they want to have the games play out. I would personally say that they could sell it in Diamond Lake, if they could find a buyer. Getting a fair price for it on the other hand is another story completely. So Diamond Lake has an 800gp limit, then they could likely sell the armor but would not be able to get more than the 800gp for it. This is of course barring an NPC in the town having access to the sort of funds necessary to pay a fair price.
I'm personally waiting for the full run of modules to be completed before starting my own AoW AP game, tying up my current campaign. So I am not familiar with the residents of Diamond Lake, keep that in mind.
Check the various NPCs detailed in the city, as well as the businesses and make a judgement based off of what you find there. One thing many people forget about, in my experience, when selling items in campaigns is that you need a buyer. How many people in a fairly rural community would be willing to hand out the gold it would take to buy the armor? If they have that kind of money, what are they doing living there? Seems to be a buyers market to me.
I would say that they could get at maximum 800 gp for it, or their choice of magic items from the two merchants in town equalling the cost of the magic armor. Or barter for mundane equipment. Or maybe just donate it to one of the local churches in exchange for some sort of token granting them discounts on clerical services to any worshipper of that deity.
If you want to be nice, perhaps Tyrol Ebberle or Venelle has contacts with dealers in such items in the Free City, and can find a buyer there. However, I'd have them claim a healthy commission fee (at least 10% of sale price) up front for the task, and it should take at least 1-2 weeks for the necessary correspondance to pass and the gold to arrive from the Free City on the stage coach.
My party's paladin donated the +1 banded mail to the Hieronean chapel as a tithe, and since its value was far beyond the expected 10% of his share of the loot, Valkus Dunn later presented him with a wand of CLW as a present, to aid him in performing his new duties. (His success in TFOE resulted in orders from the Hieronean hierarchy to focus full-time on the "worms" problem, and the party burned through the wand they had previously purchased from Valkus Dunn during TFOE (along with two partially charged captured wands), so Valkus figured he'd need it).
He's still got a bit of a credit with the church for his generous tithe, so they'll probably forgive part of the goodly sum his brother promised a passing Nyrondese archbishop when he needed to be raised halfway between Diamond Lake and Blackwall Keep.
There are all kinds of creative ways to work the business of selling loot without grossly violating the gold piece limit of a small town!