Buying a property at auction involves paying a 10% deposit on the day and signing a contract to say the remaining 90% will be paid within 28 days. Often, buyers do not have the required amount of money to buy a property outright, and they must consider finance options such as bridging loans. Bridging loans are a popular solution because this type of finance is excellent for buying a property at auction as it can be accessed within a tight timeframe.
As the name suggests, they can help ‘bridge the gap’ until a more stable long-term finance option like a mortgage is established or a sale is secured. Bridging finance can be used to buy a wide range of properties and even land. There are options for commercial and semi-commercial buildings and even residential property.
Auction Finance is a form of bridging finance used specifically to buy property auction and complete a transaction quickly. It can be a technique for making a profit from properties that are not available in the broader market, and auctions are usually a great place to pick up a bargain property.
Buying property at auctions also allows buyers to start renovations straight away, and when they buy a property quickly, it is usually at a competitive price.
Quick finance unlocks the full potential of buying a property at auction. Traditional lenders offering products like mortgages are often unable to work to the short auction time scales and only lend for specific properties.
Bridging finance can help the borrower by giving them time and money to refurbish and prepare the property for rent or sale and look for longer-term finance options.
Understanding Bridging Finance
Bridging loans are a form of short-term loans and are priced monthly rather than annually. They are generally quite expensive and could involve fees of between 0.5% and 1.5% per month. Bridging loans are much pricier than traditional residential mortgages as the equivalent annual percentage rate is between 6.1% and 19.6%.
Lenders can lend anything between £25,000 and £25m plus. However, generally, you will only be able to borrow a maximum loan-to-value ratio of 75%.
Bridging loans are not a long-term solution and should never be seen as a long-term solution. They carry substantial risk for the borrower, especially as they are usually secured against the borrower’s assets, including their current home.
There are two types of bridging loans:
- Closed Bridging Loans
These loans involve a fixed repayment date and will usually be awarded if contracts have been exchanged but are waiting for a property to be sold.
- Open Bridging Loans
There is no fixed repayment date with an open loan. However, lenders will usually expect you to repay it within a year.
The lender will be keen to see evidence of a robust repayment strategy. This might involve the use of equity from a property sale or taking out a mortgage. Bridging loans enable you to buy a property quickly, without having to wait for the slow process of gaining a mortgage.
Lenders will also be keen to see details of the new property you want to buy and the price you want to pay for it.
Features of Auction Bridging Loans
Auction bridging loans can be organised and agreed upon before an auction takes place. This means that an agreement can be made in principle from a bridging lender, and if they win the bid at auction, the finance will move quickly to the next stage. They are specifically designed to be completed within the timeframe of the Auction House.
- Non-income Based
Bridging loans are not usually granted based on income or credit. While mortgage lenders will need to see your employment history or any business plans, a bridging loan lender will not require this information.
Auction bridging finance is based on a property’s value, and bad credit is not an obstacle. However, it is worth noting bridging loan lenders will often require you to provide a clear exit strategy, and these loans are usually set against collateral.
- More Properties Considered
Specialist lenders who offer bridging loans will consider specific properties bought at auction, which high street lenders will not consider because of their condition.
Traditional lenders will not consider properties they deem as ‘un-mortgageable,’ which often includes properties in need of refurbishment or properties which lack a functional kitchen or bathroom.
This empowers developers to purchase property at a lower price for renovations before reselling it at a profit.
Traditional lenders will also look more critically at properties made with non-standard materials. An example being thatch because it is seen as both an added maintenance cost and fire risk.
Bridging loan lenders will also consider conversion. For example, someone could buy a commercial property at auction and use it for residential property and exit the property auction finance after selling or refinancing. Auction finance is granted for many properties in England, Scotland, and Wales. This includes more unusual property types like warehouses.
Bridging loans are available between 3-18 months, and loan amounts start at 25,000 with no maximum amount.
Stages of Using Auction Finance to Buy An Auction Property
- Planning and Research
Potential buyers should initially research and plan any purchase by establishing what kind of property they will buy. It is worth looking at the online auction catalogue and identifying property or properties you want to buy. A catalogue is generally released around 2-3 weeks beforehand.
The next step is to arrange a property viewing. Usually, several set times will be available when you can look around the property before the auction. Before trying to buy property at auction, the following considerations should be made:
- The necessary finance is available to you
- There are no unknown problems with the property you want to buy
- Check the auction catalogue for any conditions outlined
- If the property needs any form of refurbishment, it is worth viewing the property with, builder, architect, or surveyor to get an idea of the work and costs involved
- See if the project will be viable/profitable
- Carry out any legal searches for any restrictive covenants
Buyers should always have confidence and diligence. It is essential to remember that you cannot leave the process once you have won a property at auction.
You are in charge of ensuring that you are aware of any issues before the auction date. Buyers should check the property is identical to the catalogue’s information and get a copy of the legal pack supplied by the auctioneer, which will contain title deeds, local authority search, and property information.
Before the auction date, the buyer should decide what they will pay for their properties of interest. They should base this decision on what they think the property is worth, their property goals, and how much finance will be needed.
- Provisional Acceptance
Next, the borrower should pursue an initial approval. This step might include credit checks, identification checks, and a brief online assessment of the property.
The reasoning behind this is to give the borrower confirmation that finance is available and an understanding of how much is principally available.
Lenders will also want information about the property and the price you intend to pay for it, making the initial step so important.
- Win the Auction
Following the pre-approval process, borrowers can attend the auction and begin bidding! It is advised to attend in person because the buyer can then judge the room and gauge how many other people are interested in their target property. It is essential to remain calm and not get carried away with bidding.
If you cannot attend in person, you can get a proxy or bid on the phone. Some auction houses even allow online bidding. It is essential to prepare for this, though, as you usually need to register as an online bidder and send the auctioneer a cheque for 10% of the maximum amount you are willing to bid.
With the appropriate finances, it is sometimes possible to bid before the auction if you have also completed the proper checks and are determined to win the property.
- Following the Auction
After the auction, you will be taken to a contract room to complete a purchase slip if successful. They will require this stage to produce identification.
They will expect you to pay 10% of the purchase price as well as possible auction fees. This deposit is non-refundable. After that, there will be a further 28 days to complete the purchase.
Unfortunately, in cases where the borrower has been outbid, and the loan application has to be cancelled, they may still have to pay a valuation fee.
Before taking out finance, it is essential to note that bridging loans typically involve relatively high-interest rates and are only intended for short-term finance. Professional financial advice should be sought before taking out a bridging loan. This type of finance carries risk.
Adiel Khan has over 20 years in the property finance market has and advised and financed property developers, investors, landlords, and builders throughout the UK.
Adiel is also an experienced business advisor, supporting over 5,000 businesses in London to help businesses expand. He runs a business start-up blog startinbusiness.co.uk
Adiel is co-owner of Property Finance Partners which offers structured finance for property developers and investors in the UK.
For more information, you can contact him at firstname.lastname@example.org