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How A Bidding War Can Cost You Your Mortgage

May 13, 2015
3 mins
A young couple speaking with a financial advisor

One of the most vexing - yet ongoing - trends in real estate is the multiple-offer bidding war. (Vexing, of course, except for sellers who benefit from offer-night frenzy.) But getting caught up in the excitement can have greater consequences than paying more than you originally intended. If the final sale price goes too far above the home’s appraised value, you might not qualify to be able to pay for it at all.

Pushing Up Prices: A Worrying Trend

Anyone who’s purchased a home over the last decade or so knows the drill: a house comes on the market at a temptingly low price; you schedule a visit with your agent; decide to make an offer; figure out your best price; make an offer and then…wait for the listing agent to send all the offers back for counteroffers. Eventually, like a silent auction that’s held blindfolded, someone eventually outbids all the other interested parties.

Even when the seller doesn’t set a lowball price with the express intent of creating a bidding war, minimal supply and overwhelming demand mean that any reasonably attractive, well-located house posted at a fair market price will command lots of attention.

A recent survey commissioned by the Appraisal Institute of Canada asked Canadians who are planning to buy a house in the next year if overpaying was a concern for them. Nearly 70% said yes.

It’s no surprise, given the prevalence of bidding wars. To cite just one case study: on each of the three occasions that my wife and I have been in the market for a new house, we were priced out of contention in bidding wars multiple times before finally sealing the deal. Our patience paid off because in each case we ended up paying very close to the asking price.

You May Not Get Your Mortgage

Beyond mere buyer’s remorse, there’s a greater risk to overpaying for a house: your financial institution may not provide you enough funding to pay for it. Any mortgage application will be contingent on the bank approving the value-to-loan ratio. If the sale price raises a red flag, the bank may require an appraisal as part of their documentation. If you offered to pay $700,000 for a house but the bank’s appraiser only values it at $550,000, you’ll only qualify for a mortgage based on $550,000. So, in addition to your down payment and closing costs, you’ll need to come up with another $150,000. Odds are, you don’t have that much extra cash lying around.

With buyers in heated markets typically forgoing any conditions on their offers – including financing – and putting down hefty deposits to help their offer stand out, there’s a risk of losing that deposit and/or ending up in a costly legal battle to recover it if you cancel the deal.

Shell Out For Pro Support

One option that (obviously enough) the Appraisal Institute of Canada recommends is to have an appraisal conducted on a house before you make an offer, similar to having a pre-sale home inspection before putting down an unconditional offer.

Even if you do still manage to qualify for a mortgage on the property, there are long-term implications of overpaying. For one, your mortgage payments will be higher than they really should be. And even if housing prices continue to rise, it’ll take some time before the market value of your home matches what you paid for it. If prices start to drop and you find yourself wanting or needing to sell, you may end up selling for less than you paid.

My advice: no matter how many bidding wars you’ve lost out on, don’t let the desire to get the process over with to cloud your judgment and lead you to pay more than you think a house is worth. Remember that when you “win” an auction, all you’ve really won is the right to pay more than anyone else was willing to pay.

Allan Britnell

Toronto-based freelancer Allan Britnell is an award-winning writer with nearly 20 years’ experience. He covers a diverse range of topics, including DIY and professional home renovation projects, nature and the environment, small business, personal finance, and family and health issues. He is also the managing editor of Renovation Contractor, the publication written for small- and medium-sized contracting and custom home building companies. He lives in Toronto with his wife, two daughters, and their dog, Oscar.

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