Email Usthumb
Categories
Mortgages

What You Need to Know About Buying Homes at Auction (and How to Pay for Auction Properties with a Mortgage)

Whether you are looking to pick up your dream home at a rock-bottom price or turn a quick profit with a fixer-upper, auction property purchases can be just the thing. Buying homes at auction is quicker and easier than becoming part of a conventional property chain, and the savings on offer are unbeatable.

But as properties purchased at auction call for prompt payment, typically within 28 days, conventional mortgages have little practical value; with the typical residential mortgage currently taking around three months to arrange, this 28-day payment deadline calls for an alternative funding solution.

The Benefits of Property Auctions

One immediate benefit of buying properties at auction is the speed and simplicity of the transaction. Within 28 days, the property purchase and transfer process in its entirety are complete. You benefit from the lower prices afforded to cash buyers and there is zero risk of being ‘gazumped’ by competing bidders.

If yours is the winning bid on the day, the property is yours – and at the exact price quoted.

In addition, a much broader range of homes go under the hammer at auction than appear on the conventional property market. Homes that need to be sold as quickly as possible, properties in need of repairs and renovations, non-standard properties considered ‘unmortgageable’ by major banks – all potential bargains in the making.

You can even buy rental properties at auction that already have tenants living in them, enabling you to begin collecting regular rent payments in less than a month.

The Drawbacks of Property Auctions

On the downside, the shorter transaction times associated with auction property purchases can prove problematic.  If your bid is successful, you will be expected to pay a non-refundable reservations fee on the spot.

This may be 2.5% of the property’s agreed price (plus VAT), or a set fee of around £5,000. The contracts do not need to be signed and exchanged right away, but you will forfeit this initial reservation fee if you back out of the deal.

Upon signing the contract and agreeing to purchase the property, you will be expected to pay a 10% deposit. At this point, you will usually have 28 days (sometimes slightly longer) to come up with the rest of the money.

Another drawback to property auctions is the risk of being outbid, which could happen after paying for a formal survey of the property. There are also no guarantees yours will be the winning bid, irrespective of how many lots you bid on, and how many auctions you attend.

Financing an Auction Purchase

The time-critical nature of auction property purchases calls for something much swifter than a conventional mortgage. In addition, it is essential to arrange the necessary funding before the auction, in the form of pre-approval or a decision in principle. This will enable you to access the funds you need if your bid is successful, without having to start your application from scratch.

Most buyers pay the 10% deposit on the homes they buy at auction out of their own pockets, or perhaps by way of a personal loan or a credit card payment on the day. It is therefore important to ensure you have access to this 10% deposit on the day itself, or your bid will be cancelled and the property sold to someone else.

Bridging Loans for Auction Property Payments

One of the most convenient and cost-effective ways to fund an auction property purchase is bridging finance. Where approval is obtained in advance, a bridging loan can be arranged and accessed within a few working days.

Bridging finance can be secured against most types of property or land and can also be used to purchase any type of property – irrespective of its condition.  This makes it a particularly suitable facility for auction property purchases, where non-standard homes in questionable states of repair often go under the hammer.

A strictly short-term facility, bridging finance is designed to be repaid within a few months – charged at a monthly rate of around 0.5%. It can therefore be ideal for investors looking to flip properties for fast profits, using the funds raised at the point of sale to repay the loan.

It is also possible to repay a bridging loan by transitioning it to a conventional mortgage or similar long-term repayment facility.

Auction Preparation

In the weeks and months leading up to an auction, full details of the properties set to go under the hammer will be released. This will include a “guide price” for each home, which in most instances will be significantly lower than the price it sells for.

If there is a property you are interested in buying, you will need to arrange an in-person viewing and a professional survey. Particularly if it is a home in need of renovations and repairs, you need to know exactly what kind of work will be needed to bring it up to acceptable standard.

At this point, you could also contact a local architect or builder to provide you with an estimate regarding the proposed renovations. They may be willing to conduct a survey and provide an estimate for free if you subsequently use their services if/when your bid is successful.

Take a good look at the legal pack for the property you intend to buy and have a solicitor examine its contents on your behalf. If this is to be your first property auction, visit one or two auctions as a visitor in advance to get a feel for how the whole thing works.

On the Day of the Auction

Arriving early will give you the best shot at securing a good seat in the auction room. Ideally, you should be in a spot where you can see your competing bidders, but also where the auctioneer can clearly see you.

When the auction begins, don’t be tempted to exceed your budget and try to keep your emotions in check. Even if you have your heart set on a property for sale, you need to remain grounded and bid objectively.

If your bid is successful, you will need to provide two forms of identification, along with evidence that you can pay the deposit.

Should the property you are interested in fail to sell having not reached its reserve price, request the contact details of the seller; you may be able to negotiate with them directly, and perhaps pick up the lot for less than you intended to spend.

Can You Buy Property at an Auction with a Mortgage?

In terms of conventional mortgages, the answer is no. Based on standard mortgage processing times alone, it would be practically impossible to arrange a traditional mortgage within the 28-day time limit.

There may be the occasional exception to the rule, where an agreement is reached with a lender in advance to secure the required funds as promptly as possible. But this simply isn’t an option with most major lenders, where typical mortgage application processing times average around 12 weeks.

In addition, many (if not most) of the properties that go under the hammer at auction would not qualify for a conventional mortgage with a mainstream lender. Auction properties are often deemed ‘non-standard’ or ‘unmortgageable’ due to their repair and renovation requirements.

Fast-access funding is available in the form of bridging finance, along with specialist auction finance and development finance loans for established investors. Issued as short-term facilities, fast-access loans like these can be repaid using longer-term mortgages, once the property has been restored to an acceptable standard.

Consult with an independent broker ahead of the auction to discuss the most cost-effective funding options available.

What Happens if You Can’t Meet the Completion Deadline?

If a buyer is unable to pay for their property in full within the 28-day deadline, the transaction is cancelled, and they forfeit their deposit. Depending on the terms and conditions of the agreement, they may also be liable for the costs of listing the property once again at a future auction.

However, there is usually some leeway where buyers raise their issues with the vendor ahead of time. For example, if you simply need an extra few days/weeks to come up with the money, they will most likely demonstrate a good deal of flexibility.

After all, it is in nobody’s best interests to take the whole thing back to the drawing board.

If you have any questions or concerns regarding your ability to meet the completion deadline, ensure they are discussed with the seller at the earliest possible stage.

Pros and Cons of Buying at Auction

In summary, a brief overview of the pros and cons of buying properties at auction:

Pros

  • The opportunity to secure an unbeatable bargain
  • A much faster and simpler transaction
  • No reliance on risky property chains
  • Zero risk of being gazumped by competing buyers
  • A broader range of properties to choose from

Cons

  • No guarantees you will walk away with a property
  • Full payment is required within 28 days

Auction property purchases can therefore be advantageous in many ways, but will always call for careful planning and forethought.

For more information on how to fund auction property purchases or to discuss the benefits of buying at auction in more detail, contact a member of the team at UK Property Finance today.

thumb

Live Chat

hi Olivia here,
how can I help?