Tuesday, May 01, 2007

Overextending Yourself and Facing Reality

Recently I had a call from a friend who is trying to buy his first home. He is currently buying into a very hot real estate market and has so far had no luck getting a house. The major reason he hasn't got a a house is the market is so hot he has to overbidding the asking price by at least $20,000 with no conditions just to get a shot at a house.

During the discussion it came out that he is trying to get a house near the top of his range given to him by the bank. He knows that he would end up house poor if he did it, but he is still shopping in that range. Why would anyone over extend themselves like that? Simple, he thinks he deserves a single detached house regardless of the consequences.

At times like these I hate to do it, but at the same time someone has to point out what he wants and what he can really afford at this time are two different things. It is time to face reality that overextending yourself is never a good idea. Your cash flow situation ends up so tight that you end up frustrated and often tempted by credit to buy all those things you need for your first house like a lawnmower and appliances. I know this can happen because I ran the numbers myself when I bought my first home. I could afford the over $250,000 the bank approved me for, but I wouldn't have money for anything else. I've seen the pain this causes for people when they get into this situation a few times now, it isn't very nice.

So what's the solution? If the plan isn't working perhaps it is time to change the plan. Perhaps my friend should start out in an apartment condo and keep saving for a few more years. Then when the market isn't so hot go shopping for want he really wants with a larger down payment and hopefully a larger income.

Shopping in a hot real estate market is a brutal thing to have to go through and I don't wish it on anyone. Yet markets like that tend to produce bad decisions based on emotion rather than facts. If you are in a hot market take care to avoid overextending yourself otherwise you might find yourself selling your beloved house when interest rates go up because you can no longer afford it.


Mike said...

Great post.

We ended up overextending ourselves on our house because of renovations and I wish we were back in my old house. We are getting out of our financial jam but I'd undo the whole thing if I could.

SavingsJourney said...

The same thing applies to money in general. I've been a sucker for paying just that little extra more for that nicer "something", whether it's furniture, a car, toys, whatever. But the temptations are quickly fading for me thankfully.

There really is a level of maturity (or financial education?) required to come to senses and make smart financial decisions for the long term. I hope when we buy our first house next year we don't overextend ourselves either. We're waiting until after income taxes. I just have this sinking feeling as each day passes that something small and simple in Toronto will become out of our reach, with the hot market & rising interest rates this year (if they rise a lot). I'm just hoping that a cheap, run down house in Toronto next year isn't beyond our means...guess we'll have to move to the suburbs if that happens :(

Mike said...

SJ - I hate to say it but if you are buying you're first house then sometimes you have to extend a bit. Obviously you need to compromise on area etc but there is not much you can do about prices.

Canadian Dream said...


Good point. I didn't mention how renovations can do the same thing as getting too much of a mortgage in the first place.


Mike is right. Don't assume that by moving the suburbs is really going to save you any money. You just end up exchanging the money up front for the house for commuting money over the next ten years.


Middle Class Millionaire said...

Hi CD,
I have a friend in the same situation. He overextended himself and bought a nice detached home. He ended up having to sell 3yrs later and downsizing.