Property developers can use auction financing to buy a property for less than market value from a motivated seller. It might even be suitable for inexperienced developers or investors.
Auctions may be a viable option for both experienced developers and property entrepreneurs looking to purchase properties below market value. Buying at the right price might mean the difference between profit and loss in any situation, whether it’s a flip, basic refurb or a more substantial repair or development.
However, auctions may be a riskier approach to purchase property than established channels, as properties are auctioned in short time limits, leaving you little time to conduct necessary research and due diligence.
Keep reading to discover more about auction finance. We have a lot of helpful ideas for property developers, as well as some specialised tips for purchasing property at auction.
What is the definition of auction finance?
Putting your hand up and bidding on a property worth hundreds of thousands of pounds is daunting even for seasoned auctioneers. If you win the auction, you’ll usually be required to pay a nonrefundable deposit on the day of the sale, with the balance payable within 28 days.
As a result, auctions have a much shorter schedule than other kinds of property acquisition, and unless you’re a cash buyer, raising the funds in time might be difficult, even if you have a lot of untapped equity across your portfolio. Although auction property finance is a flexible solution that may be tailored to meet unique requirements, the fundamental concept is that you’ll enter the auction room with an agreement in principle (AiP) – and thus established budgets and criteria – before bidding.
What is auction finance and how does it work?
With average asking prices in the UK approaching £350,000 and witnessing the fastest monthly growth in 20 years, even a 10% deposit might be a large sum of money. Property auction finance can assist you in a variety of ways, beginning even before the auction occurs. You can pre-arrange your property loan using auction financing so that you know exactly how much you can spend and what type of property the lender will finance before the hammer falls. The following is how auction financing works:
Step 1: Research and planning
The first step in obtaining auction financing is to determine the type of property you want to add to your portfolio, followed by locating an auction to attend. Then you can construct a shortlist of homes you’re interested in from that auction and present it to a broker or lender. If you don’t have a broker or lender in mind, go to BridgingLoan.Org.Uk, which provides a free directory of UK bridging finance brokers and lenders. You might also inquire at the auction houses where you’re thinking of bidding to see whether auction finance lenders offer loans to its buyers.
Tips for success: Consider where you’re likely to see the best rental and capital yields if you’re looking to invest in residential property as a Buy-to-Let (BTL). To avoid unintentionally purchasing a BTL in an unattractive location, it’s also a good idea to only buy in locations you’re familiar with.
Step 2: Principled agreement
The next step is to complete the lender’s provisional approval process, which includes providing personal information such as your full name, date of birth, current address, and three-year address history.
You’ll also need to provide information about the property you plan to use as collateral, such as its open market worth, accessible equity, and whether it’s free and clear or encumbered by a mortgage or other loans. In this scenario you can get an exact picture of the maximum loan you can get with this security, as well as the loan expenses and fees. The lender should also be reasonably certain that the loan is sound.
The process is a little more complicated if you plan to utilise the property you bought at auction as collateral. You’ll be questioned about the expected purchase price, the open market worth, and whether you want to refurbish or renovate it, as well as the estimated costs. All of these figures are liable to change, making it impossible for the lender to provide any assurance regarding the agreement other than that the loan ‘in principle’ works.
If you’re interested in learning more about a property after reviewing the details, the next step is to obtain the legal pack. To avoid any unpleasant surprises, it’s a good idea to have your solicitor evaluate it once it’s been received.
You should check the property, and if you aren’t a real estate professional, you should bring someone with you on the site visit. Remember that a valuer will come to the property to prepare a valuation report for your lender, so walk in with an open mind and ask yourself, “Where are the problems?” Inspect the property thoroughly from the roof structure to the floor joists to the inside, looking for asbestos, evidence of mould, damp, subsidence, and Japanese knotweed in the garden.
It’s not just the property that needs to be seen; it’s also the location. Examine the neighbourhood amenities, such as whether the property is close to a main road, a busy intersection, an airport, a quarry, or a landfill, and whether the region has good schools.
It’s also a good idea to think about how much experience you have. Property developers with a proven track record of successful projects are significantly easier to lend to from the lender’s standpoint because their risk is reduced. While it is possible to obtain financing without much expertise, if you are new to property development, you will most likely be required to provide additional security.
You may also be asked to provide additional information, such as your earnings, credit history and current credit score, as well as your spending habits. No supporting documentation is required at this time; however, you will be required to demonstrate proof of the information provided later. It should go without saying that when providing data to lenders, you should always be as exact as possible. If there are inconsistencies in the information you’ve provided, they’ll be discovered through due diligence checks later, putting your loan in jeopardy.
Step 3: Place a bid and win
You’ll know how much money you have to bid with on auction day, as well as the property requirements the lender is comfortable lending against. Top tip: Stick to the criteria you’ve agreed to with the lender; if you bid more than you can afford to pay, the lender has no duty to adjust the conditions or criteria. For example, if you have an agreement in principle to finance 80% of a four-bedroom property with a sale price of £400,000, you’ll need to fund the 20% shortfall yourself, which would be £80,000. Simply bidding 10% above the sale price will likely require you to increase the deposit you need to put towards the property by another £40,000 – not an easy task.
Step 4: Closing the transaction
So, congrats on being the winning bidder at the auction! What’s next? You’ll have to pay a 10% deposit right away. After that, you’ll have no more than 28 days to pay the unpaid balance. Acting quickly will help you avoid unnecessary expenditures and fees, as well as the possibility of not being able to secure the cash you require to complete the acquisition. Top tip: Be quick to act; if your loan agreement falls through, the more time you have to find another, the better. If each participant is motivated, auction funding can be finished in as little as seven days, but expect it to take at least ten days. Keep in mind that if you do not complete your auction purchase within the 28-day timeframe, your deposit will be forfeited.
Step 5: When the loan is paid off
You must repay your loan when the time expires. There are various options for repaying the loan. The selling of the property or refinancing the loan into a standard residential or buy-to-let mortgage are common exit methods. If you aren’t ready to pay off the loan yet, you may be able to get a bridging loan refinance.
Is it possible to acquire a commercial property with auction financing?
Yes, you can use property auction financing to purchase commercial and semi-commercial auction properties. While the auction finance rates and lending criteria for commercial properties differ from those for residential homes, there are a number of specialist auction finance lenders who will lend on commercial properties.
Is auction financing the best option for me?
If you want to buy a property at auction but your operating money is locked up in your portfolio’s equity, property auction finance is a good option. Perhaps you have a large amount of working capital in the bank, but you’d rather put it toward a more desirable property with a larger prospective return.
It’s also a good idea to consider your level of experience. From the lender’s perspective, property developers with an established track record of successful projects are substantially easier to lend to because their risk is decreased. While it is feasible to acquire finance without much experience, you will almost certainly be needed to offer more security if you are new to property development.
Overall, auction financing enables you to diversify your portfolio even if the majority of your funds are invested in other properties. It allows you to take part in real estate auctions, which are one of the most thrilling ways to buy a home.
