If you are considering purchasing a property, one option worth considering is buying your home at auction. Auctions offer many advantages for buyers, including avoiding lengthy and uncertain buying procedures. However, there are certain specifics to the process that you need to be aware of.
When you are looking into what is property auction finance and how does it work, here are a few vital points to consider.
What is Property Auction Finance?
Auction finance is also known as bridging or short-term finance. This type of finance can be used to purchase properties at an auction. It can be arranged extremely quickly to accommodate the purchasing timescales of the auction houses.
Often times, when you participate in an auction, you need to secure the property and alternative finance such as bridging loans can help you do that.
Bridging loans are a way to obtain short-term funding, so you can complete the purchase within the 28-day time frame that auction houses typically give. You can then apply for a standard home equity loan or mortgage. Bridging loans are offered by a range of specialist lenders and can be arranged quickly. However, they are very different from a mortgage and have some drawbacks.
Bridging loans tend to be much more expensive than standard home equity loans or mortgages. They can be secured against any assets you own, including your current property. For this reason bridging loans should never be considered as a long-term solution.
This type of finance can be useful in some situations, but it’s not the right choice for everyone. If you want to find out whether property auction finance is right for you, it’s best to seek independent financial advice before taking out a bridging loan.
What sort of properties can you buy with auction finance?
You can purchase any residential, commercial or mixed use property regardless of whether it is habitable or not. Some providers also allow you to source auction finance to purchase land.
Residential property
You may be purchasing a residential property with the intent to renovate and use as your main home or buying it to rent it out. Many landlords buy properties using auction finance because a buy to let mortgage requires more time to apply and be approved for.
You can then refinance at a later stage. If you are applying for property auction finance, the lender may look into your homeowner history. Some providers prefer buyers who have owned a property for at least six months before they will consider refinancing.
Commercial property
Shops, offices, restaurants, pubs, leisure centres, industrial units, and warehouses are also eligible for a property auction finance. Funding is available for single landowners or business owner-occupiers.
Mixed use property
Also known as semi-commercial property, you can source auction finance for premises that are part commercial and part residential such as shops and offices with flats above.
What you need to know before buying a property at auction
If you are certain that property auction finance is the right way to you should be aware that a 10% cash deposit is typically required.
Once you settle on the property you like, you typically need to have a 10% cash deposit immediately available to pay the deposit. This secures the desired property at the auction. Additionally, you will need cash to pay all associated auction fees.
These could include any administration charges (admin fees payable to the auction house, can be a fixed or variable fee based on sale price) or buyer’s premium (fees payable to the auction house for facilitating the sale, typically a fixed fee). The total of these is found in the property details.
After paying the initial deposit and any associated fees, the balance of the amount payable will fall due at completion and will be paid via your solicitor. Completion is usually required to take place within 28 days.
However, this can vary depending on the auction. For this reason, you will need to have appropriate financing in place at the moment of bidding at the auction. It is possible to use a traditional mortgage lender but most people prefer specialist property auction finance or cash because of the time constraint. Buying a property at auction is legally binding and failure to meet the payout deadline could result in the loss of your initial deposit.
The nature of the transaction when buying property at an auction highlights the specifics of property auction finance. This form of bridging finance is specifically used to complete a transaction quickly.
Auction finance providers don’t follow a standard valuation process as properties are deemed to be valued at the price agreed via the auction process. There is also a higher rate of interest charged to compensate for the additional risk taken by the provider.
Once you obtain auction finance, you can remortgage onto a traditional mortgage or buy-to-let mortgage after securing the property. Auction financing providers often do not have exit fees to facilitate this process.
However, not all properties purchased at auction are eligible for traditional residential or buy-to-let mortgages. For example, if a property does not have a working kitchen, it would be deemed uninhabitable. You can’t remortgage such properties until you have corrected such issues. Some of these issues may not necessarily be easily remedied and thus due diligence prior to purchase is of paramount importance.
The benefit of buying a property with property auction finance
There are several advantages of buying a property at auction are:
The main one is related to the speed at which the transaction can be closed. Timelines are fixed and known at the point of purchase, with no chain involved.
Once the property is secured, you have certainty as a buyer as neither party can withdraw from the deal.
You may also have more choice with regards to certain types of properties (e.g. properties needing cosmetic and/or structural work, tenanted properties) since they tend to be commonly listed via auction houses. You can thus gain exposure to a greater number of opportunities.
The process of buying a property at auction is transparent and gives confidence that you are purchasing at market value. This is true because you are bidding against other interested parties who are also putting their money on the table. This guarantees that you will only pay one increment higher than the next highest bidder.
Buying a property at auction comes with the increased likelihood that you purchase property at below market value provide that a low reserve/guide price is set and the bidding is not as active as expected.
If you are acquiring tenanted properties, as a landlord you’ll begin receiving rent from completion date (which typically takes place within 28 days of the auction date). This translates to an immediate return on capital instead of tying cash up for a longer period of time when acquiring property via the traditional purchase process.
That being said, you need to have full confidence in the pre-purchase due diligence as you will incur costs (legal costs, surveyor costs, etc) without being in exclusivity with the vendor. Further, you will be unaware as to whether you will be able to secure the property at the price you are hoping if there are other bidders.
You also need to factor in the additional costs payable to the auction house (buyers premium, administration fee). Once you’ve won the auction, you cannot walk away from the deal. Once the hammer drops, you are contractually committed to purchasing the property and must pay a 10% cash deposit immediately
How do property auctions work?
Thousands of properties are sold each year at auction in the UK. They attract not only investors and buyers looking for properties to do up and sell, but mainstream buyers and sellers as well.
Property auctions are usually planned months in advance. Auction houses publicly release a catalogue of properties, known as lots ahead of the auction date. These catalogues of properties are distributed to potential bidders around the month before the auction.
Each property is listed with a guide price, which is the estimation of the auction house or seller on its worth. This is different from the reserve price, which is the minimum price the seller will actually accept, which is usually kept confidential.
Be aware that guide and reserve prices can vary in the days leading up to, and on the day of, the auction.
Auctions can present an opportune moment to snap a good property but they need to be handled with care. It’s easy to overbid if you get caught in the heat of a bidding war for a lucrative property. For this purpose, it’s important to craft a plan for action and, more importantly, follow it through.
