Auction Finance

When buying a property at auction, it is vital that you are aware that you will be required to pay a 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.

Bridging loans 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 on income or credit history. It is more important that you have a viable exit strategy that clearly outlines the manner in which you intend to repay the loan. This is often done through the sale of the property after renovation or upgrade or through re-financing, for example, with a long-term mortgage.
• Most high-street lenders will only consider lending on certain properties for auction, namely those that are habitable. Specialist bridging lenders, however, are more flexible in their approach and will often approve lending for buildings that are uninhabitable or properties that are non-standard construction types. This enables investors to purchase buildings with high-profit potential. Once the property has been brought up to standard, it can be refinanced using more traditional funding products.
• Bridging loan lenders will not only consider funding smaller refurbishments but will also approve loans for auction properties that require heavy renovations, for example, an old commercial building being converted into a multiple-flat building.
• Bridging finance is short-term and typically has a loan term of 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 costs of any refurbishment and/or renovation using the relevant professionals, such as building contractors, architects, surveyors, etc.
• Calculate the expected profit to ensure the viability of the purchase.
• The auctioneer will provide a legal pack outlining information such as relevant property details, local searches, title deeds, etc. Make sure you have read this.
• Perform any necessary legal searches to ensure there are no restrictive covenants on 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 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. Arranging 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 make the repayment. The size of the loan will be based on the loan-to-value ratio (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 are typically repaid by selling the property, refinancing with a long-term loan, or paying off the bridging loan with cash.

Example:

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 solicitor’s details and signing a legally binding contract that ties you into paying the balance within the next 28 days. You contact the bridging loan company that values the asset and agrees to advance the balance of the money, which is done within the agreed time frame.

Important notes

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 financing 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, alternatively owned properties or properties owned by a willing person could be used to secure the purchase.

Should the 10% deposit not be available, it can be secured on another property if required.

Exiting 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.