Navigating the housing market has become increasingly challenging for homebuyers. With limited inventory, soaring demand, and rising prices, securing a dream home feels more like a competitive sport than a straightforward transaction. Many buyers find themselves in bidding wars, driving up prices far beyond the fair market price, but as Sebastian Jania of Ontario Property Buyers warns, overbidding carries significant risks. "These risks have been actualized more than ever over the past two years as many homeowners have felt the repercussions of overbidding as their appraisal values have fallen from the peak of the market," he shared. Before you let emotions get in the way of a major purchase, consider what may happen if you overbid on your new home.
1. Financing May Not Cover the Sale
"The first risk of overbidding when purchasing a home is that the mortgage lender may not cover the purchase to the degree that one thought or expected," warns Jania. In some areas, the list price is already exceedingly high, while in other regions the real estate market is attempting to course-correct and level the price of homes. Mortgage rates aren't at record highs, but lenders still have a close eye on providing accurate valuations in the wake of the housing price surge. "Typically when it comes to overbidding, potential buyers are putting in their highest offers and are pushing the property purchase price to as high as the housing market will allow. The risk with this is that typically these offers have to be without conditions which means that a required appraisal may be done after the property purchase is firm." Appraisal contingencies can help, but a seller isn't always going to be open to lowering the sale price if there are multiple offers on the table.
He adds, "[If] the appraisal does not come in high enough, the buyer may have to bring additional funds to the closing table. Should the buyer not have a mortgage loan large enough for closing, the buyer may find themselves in legal trouble."
2. You Might Not Have Enough Left For Unexpected Repairs
"The second risk of overbidding when purchasing a home is that because these bidding scenarios often require firm offers, one may miss out on getting a proper inspection done," cautions Jania. Yes, it's a popular negotiation tactic, but without an inspection, a homebuyer may overlook telltale signs of damage or critical repairs that can cost a boatload of money. "This may result in additional costs after the property closes. It may put the homebuyer in a situation where they don't have the funds to make necessary repairs... and perhaps has to sell a short while later."
3. It Can Reduce the Size of Your Safety Net
"The third risk of overbidding when purchasing homes is that one may actually go and offer more money than they had planned to," shares Jania. "A blind bidding situation is often like an auction and participants can become more emotional and not stick to their predetermined max allowable offer."
Even if it's not an overpriced house, a competitive market can also drive some homebuyers into a position where they consider properties out of their price range, including homes with larger square footage and higher property taxes. It can result in higher closing costs, higher monthly payments, Even if a buyer can make it work for the time being, as a long-term investment involving actual money, it might not be a practical decision. "[Winning a high bid] can put someone in an incredibly difficult situation should they experience any kind of financial hardship such as a job loss."
4. It Can Lead to a Conflict of Interest
"The last risk when it comes to overbidding is that the pressure around simply make a poor purchasing decision," warns Jania. "If a buyer is placing offers on properties that are on the market with a real estate agent, agents may find that they have to make many many offers without a successful purchase. These scenarios presents the real estate agent with potential conflicts of interest where they're incentivized to have their client overpay on the property just to close a deal." Homebuyers might catch on to these unwanted vibes, but they might truly believe that the real estate agent is working in their best interest.
