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The risk of making an offer well over a house’s asking price

On Behalf of | Apr 20, 2022 | Residential Real Estate |

The law of supply and demand is a cornerstone of modern economics.  When there is plenty of supply, prices drop, but when supply is low, they rise.  Most people understand the idea well enough.  When there is more demand than supply, prices can increase dramatically.

The current housing market is a perfect example of this phenomenon.  With low inventory levels of houses for sale have come increasingly frantic bidding wars for properties.  Buyers often pay well above the asking price for a property, and sellers go through multiple offers on the property to pick the most attractive one, instead of competing for the attention of buyers.

Offering as much as possible certainly makes your bid more competitive, but it creates an entirely new risk.

You could have a significant appraisal gap

The selling price of a property is not always a reflection of its true value.  Lenders demand appraisals in part to ensure that competitive markets don’t lead to unsustainable price growth that leaves the lender with significant risk.  When you make an offer on a property and the appraisal comes in at a lower amount, the lender may not agree to finance the full purchase price.

You may need to look for other financing, obtain the liquid capital necessary to cover the gap between the appraised value and the price you offered or back out of the transaction altogether.  Making a competitive offer is important in trying to buy residential real estate, but you need to take care to ensure that you don’t overextend yourself and price yourself right out of the purchase.

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