Buying property at auction takes place over a time-frame which often makes conventional finance, such as mortgages, ineffective.
A specialist type of loan, known as auction finance, has evolved to fill this gap. Effectively, a type of bridging loan that is designed to fund property auction purchases at haste. These loans can be implemented very quickly. Speed is of the essence with this situation, as property buyers are typically expected to be hand over the balance of the purchase price within just 28 days. This is due to the fact that you become the legal owner of the property once the hammer comes down and the winning price falls due.
In this article we’ll discuss how property auction finance works, what the pros and cons are. We also cover how best to use it in order to facilitate your property investment.
How Does Auction Finance Work for Property Developers?
Property developers commonly used auctions as a way of securing desirable properties at competitive prices. They are commonly used to expand portfolios but the ease of doing so is often hampered by the inability to mobilise finances fast enough to meet the exacting terms of the auction house.
Most auction houses require an immediate deposit (of at least 10%) after successful purchase followed by the balance within 28 days.
For most developers this means you need to have the finance ready before you walk into the auction room, with the requisite paperwork at your fingertips.
While auction finance is labelled as a specialist product, it is – to all intents and purposes – a bridging loan which comes with a higher interest rate based on the short term nature of the finance, and the relatively high risk for lenders.
The main thing with any bridging loan is to have an exit strategy in mind, and a carefully thought out timeframe.
Be sure to talk through your plans with an independent financial advisor if you’re unsure about anything.
How do you Finance an Auction Property?
If you’re in the process of considering auction finance in preparation for a property purchase, here is the basic process
(1) Select a Shortlist of Auction Properties
You need to go to the lender with specifics so firstly examine the properties at a forthcoming auction and shortlist ones of interest.
(2) Approach the Lender
The lenders approval process will include:
- Credit Checks
- Independent property valuation
- Confirmation of your income
Assuming their criteria are met, you will receive provisional acceptance at this point.
(3) Bid at Auction with Pre-Approval
Once you know what the lender has agreed upon, you can attend the auction with the foreknowledge of how much funding you have available.
Novice developers will receive less prefential terms than developers who can show a proven track record of successfully buying and clearing their auction finance within agreed timeframes.
(4) Win the Auction
Once you’ve won the auction, you pay your deposit and then let the lender pay the balance directly.
NB: never be tempted to bid beyond the agreed figures. Lenders will very likely pull the whole finance deal should you do this, leaving you in a difficult situation.
Can I get 100% Auction Finance?
In some cases it is possible to arrange finance for 100% of the property value of a given property.
In these type of cases, the lender is likely to ask for a first charge over the property being purchases, plus a second charge over an existing property
Most lenders will accept multiple securities if one is not sufficient. In these cases you should expect to pay seperate valuation fees for each one.
How much Deposit do I Need for Auction Property?
Auction finance is usually available at a maximum of 75% LTV, in most cases.
Where the risk for the lender increases, this is likely to drop to between 50-60% LTV, meaning the potential buyer will need a substantial deposit for the finance to be viable.
In all cases the lender will be examining your exit strategy – how you plan to repay the bridge loan – and the risks around this will be carefully weighed up.
What are the Fees Associated With Auction Finance?
- Administration Charge (aka ‘buyer’s premium) which is paid to the auction house. You’ll find out more about these in the property listing details
- Finance Broker’s Arrangement Fee – Finance providers charge arrangement fees which are typically around 2%
- Redemption Administration Fee – Some lenders charge another fee which is paid at the end of the agreed term. This is to cover administrative costs involved with closing the account
- Broker Fee – Brokers charge typically 0.5-1% of the total figure. NB If you choose to get a finance quote through Business Expert you avoid broker fees entirely!
- Solicitor’s Fees – these will be at your own expense
Secure funding before the auction, plus bring a projected deposit of 10% if you win. Your finance provider will settle the remainder within 30 days as per agreed terms.
Acution finance, via an approved provider, is the standard way to finance auction properties. Auction finance is a specialist form of bridging loan, working along the same lines.
Yes, assuming you get an agreement in principle before the auction. You’ll also need to ensure the particular property you’re interested in is eligible for a mortgage – not all are.