What Are the Risks of Bidding Over the Asking Price on a House?

Buying a home is an important and exciting step. In a competitive housing market, bidding over the asking price can sometimes seem like the only way to secure your dream home. However, this strategy comes with risks. Here, you’ll learn about these risks and how to reduce or mitigate them.

What does bidding over the asking price mean?

Bidding over the asking price means offering more than the listed price of a property. This is common in competitive housing markets where demand outpaces supply. According to a report by NOS, in 2022, 81% of homes were sold above the asking price. This percentage dropped to 31% in the first quarter of 2023 but rose again to 53% by the end of the year. By the third quarter of 2024, 69% of homes were sold above the asking price, with an average overbid of 4.6%. These figures illustrate the current fierce competition in the housing market.

The risks of bidding over the asking price

1. Risk of negative equity

Negative equity occurs when your home’s value is lower than your mortgage debt, often due to a decline in property prices. By bidding over the market value of a home, you risk starting with a mortgage that matches the property’s value. This increases your Loan-to-Value (LTV) ratio, making you financially vulnerable with less buffer in case of a price drop. If you’re forced to sell the property unexpectedly, you might be left with residual debt. Additionally, owning a home worth less than its mortgage not only impacts your financial stability but also limits your ability to move to a new home or refinance your mortgage.

Tip: A mortgage with a National Mortgage Guarantee (NHG) can offer some protection in the event of a forced sale. However, keep in mind that overbids exceeding the NHG cost limit are not covered.

2. Need for personal funds to cover the difference

In the Netherlands, you can finance up to 100% of a property’s market value with a mortgage. This means the amount you overbid may need to come from your own savings. This can be a significant financial burden, especially if you lack sufficient personal funds. In practice, appraisers often align their valuation with the agreed bid, which can lead to a mortgage amount that exceeds the property’s actual market value.

3. Financing challenges

Banks base their loans on the appraised value of the property, not on your bid. If your bid exceeds the appraised value, you risk not being able to borrow enough. Without a financing contingency in your offer, you could face penalties if the financing falls through. These penalties are typically 10% of the purchase price. For a home priced at € 450.000, this would mean a penalty of € 45.000.

4. Unpredictability of the housing market

Although house prices have risen in recent years, this is no guarantee for the future. A downturn in the housing market could turn your overbid into a financial pitfall, especially if you need to sell in the short term.

How to mitigate the risks

To reduce the risks associated with bidding over the asking price, thorough preparation is key

Set a realistic budget in which you not only account for your mortgage but also the buyer’s costs and a financial buffer.
Know the appraised value of the property before making an offer. This will give you a clear understanding of its worth.
Always include a financing contingency in your offer unless you are fully confident that you can secure financing for the overbid amount. This will protect you from high penalties if financing fails.
Consider your long-term plans. If you intend to stay in the property for a long time, you’ll be better positioned to weather potential market declines.