Risks of Overpaying for a Home

Allison DeMontmorency • January 27, 2021

Risks of Overpaying for a Home

With the heat of our current market condition, I think it is really important to talk about the consequences of “overpaying” for a home. Sure, in multiple offer situations buyers are often offering to pay over asking for a home. “Sold over asking” – we are hearing of this scenario over and over again. However, there are risks associated with overpaying for a home.

𝗕𝘂𝘁 𝘄𝗵𝗮𝘁 𝗮 𝗹𝗼𝘁 𝗼𝗳 𝗽𝗲𝗼𝗽𝗹𝗲 𝗮𝗿𝗲𝗻’𝘁 𝘁𝗮𝗹𝗸𝗶𝗻𝗴 𝗮𝗯𝗼𝘂𝘁 𝗶𝘀 𝘄𝗵𝗮𝘁 𝗵𝗮𝗽𝗽𝗲𝗻𝘀 𝗶𝗳 𝘆𝗼𝘂 𝗼𝘃𝗲𝗿𝗽𝗮𝘆 𝗮𝗻𝗱 𝘁𝗵𝗲𝗿𝗲 𝗶𝘀 𝗮 𝘀𝗵𝗼𝗿𝘁𝗳𝗮𝗹𝗹 𝗼𝗳 𝗺𝗼𝗻𝗲𝘆?

Here’s an example:

Let’s say a home is listed for $𝟲𝟱𝟬,𝟬𝟬𝟬 and you offer $𝟴𝟱𝟬,𝟬𝟬𝟬 and your offer is accepted… YAY! Although you’ve been pre-approved and know you can spend upwards of 900,000, it doesn’t mean the home you purchased qualifies for a purchase price of 850,000. Let’s say the bank appraises the home at $𝟳𝟳𝟱,𝟬𝟬𝟬.
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What happens now?There’s now a shortfall of $75,000
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1. The 𝗯𝘂𝘆𝗲𝗿 𝗶𝘀 𝗿𝗲𝘀𝗽𝗼𝗻𝘀𝗶𝗯𝗹𝗲 to come up with the shortfall balance
2. If the buyer can’t come up with that extra $75K, they will be in breach of contract and run a risk of losing their deposit
3. The seller could pursue legal action if they can’t sell the home for that amount of money again
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The moral of the story is please ensure you are working with a trusted real estate professional who cares for their clients well being and can help you navigate what can be a tricky market at times. It’s important to understand the risks of overpaying for a home.