When buying property at auction it is vital that you are aware that you will be required to pay 10% deposit on the day and to have those funds already arranged beforehand. The remaining balance will need to be paid within 28 days and as this is legally binding it is imperative that you know exactly how you intend to meet this obligation.
Bridging finance is the perfect funding method, used by many landlords and property investors, to fund the purchase of a property they intend to buy at auction. The short term nature, speed of approval and flexibility of bridging finance are all attractive features for buyers looking to find a great auction deal.
A bridging loan can be used to fund a variety of property types including residential, buy-to-let, commercial and multi-use properties at auction.
Key Features of Auction Bridging Loans:
- Bridging finance can be arranged quickly when time is of the essence, and you need to move fast, as you will do when buying a property at auction. If you already have an agreement in principle for a bridging loan then you have a definite advantage at auction.
- Unlike more traditional loans, bridging finance is not necessarily based upon income or credit history. It is more important that you have a viable exit strategy which lays out clearly the manner in which you intend to repay the loan. This is often through the sale of the property after renovation/upgrade or through re-financing for example, with a long term mortgage.
- Most high street lenders will only consider lending for certain properties for auction, namely properties that habitable. Specialist bridging lenders, however, are more flexible in their approach and will often approve lending for buildings which are uninhabitable or properties that are non-standard construction types. This enables investors to purchase buildings with a big profit potential. Once the property has been brought up to standard then it can be refinanced using more traditional funding products.
- Bridging loan lenders will not only consider funding smaller refurbishment but will also approve loans for auction property that requires heavy renovations for example and old commercial building being converted into a multiple apartment building.
- Bridging finance is short term and typically has a loan term up to 12 months, but this can be extended to 18 months under certain circumstances.
- Lenders will typically lend up to 70-75% LTV (loan to value) however this could be higher depending on the lender and the security you have to offer.
- Borrowers with a good credit history and sufficient security may be able to achieve lower interest rates and better deals than those who do not.
Things to Ensure Prior to Bidding for a Property at Auction:
- You must ensure that you have your funding in place; for both the deposit and the balance due in 28 days.
- Make sure you have thoroughly inspected the property you want to bid on so that there are no surprises later that could be costly.
- Familiarise yourself with the auction catalogue and all the terms and conditions.
- Work out all the costing of any refurbishment and/or renovations using the relevant professionals, such as building contractors, architects, surveyors etc.
- Calculate expected profit to ensure the viability of the purchase.
- The auctioneer will provide a legal pack outlining information such as relevant property details, local searched, title deeds etc. Make sure you have read this.
- Perform any necessary legal searches to ensure there are no restrictive covenants for the property.
Purchasing Auction Property Using Bridging Finance
The majority of home buyers do not have the huge sums of cash necessary to buy a property outright particularly in times when house prices have seen a significant increase. This is where bridging finance can be extremely beneficial in helping people to realise their dreams.
For those looking to buy through at auction, a bridging loan is the perfect funding solution and can be arranged either ‘in principle’, prior to the auction or very quickly following the auction. The speed at which bridging finance can be arranged is one of its strongest advantages which makes it the best path to take when buying at auction. To arrange a traditional mortgage would take much longer and buyers could end up missing out on great opportunities.
Bridging finance can also be used for auction properties that are deemed uninhabitable. This type of property will not, in most cases, be eligible for a typical mortgage product until it has been upgraded to acceptable
standards. Buildings with no bathroom and/or kitchen will generally be rejected for a mortgage until the necessary renovations have been completed. This is where bridging finance comes in as it can be used to get the property up to a liveable standard.
Another popular use for bridging finance is to fund new build properties that either require additional renovation or need cash to bring the project to completion. It would be virtually impossible to raise finance through a mortgage for a property in these circumstances, however, bridging finance considers the value of the security asset to assess the viability of the borrower being able to may the repayment. The size of the loan will be based on the loan to value (LTV).
Auctions are not limited to just residential properties, and buyers will also have the opportunity to grab great deals on land and commercial buildings, which can be financed by applying for a bridging loan.
Bridging finance for auction property is a short term solution and as such will require a realistic exit plan so that the lender has complete confidence in your ability to meet the payment requirements. Bridging loans typically repaid by selling the property, refinancing with a long term loan or paying off the bridging loan with cash.
You attend an auction with the premise of buying a property in your local area that you know because of its locality and condition, if purchased at the right price the property can be renovated and turned around creating a good profit. You are triumphant with your bid and have your 10% deposit which you pay to the auctioneer along with providing your solicitors details and signing a legally binding contract which ties you into paying the balance within the next 28 days. You contact the bridging loan company who values the asset and agrees to advance the balance of the money which is done so within the agreed time frame.
It is advisable to get the property valued and the finance agreed before attending the auction. In this way even if you are unsuccessful with your bid, the only loss would be the cost of the valuation fee. If you are unable to obtain finance after the payment of the 10% deposit then you could potentially lose all of this money.
In the rare exception when the auction purchase is not suitable for bridging finance, alternative owned properties or properties owned by a willing person could be used to secure the purchase.
Should the 10% deposit not be available, this can be secured on another property if required.
Exit again is the key to whether or not bridging finance is available. The exit is usually either sale or refinance and the lender has to be confident that either one is fully suitable.
Bridging finance is not right for all situations but we always make sure that any loan we arrange is right for you and your needs.