This is a form of bridging finance used for buying property at auction and specifically to complete a transaction quickly (typically within 14 or 28 days of the auction)Get Finance
Auction Finance is a form of bridging loan used to buy a property at auction and complete the purchase quickly.
Auction purchases generally have to be completed within 28 days of the auction. In general, if you want to buy a property the conventional way, it is unlikely to be arranged within that period.
The auction house will usually ask you to pay 10% of the purchase price. In addition, auction fees will be payable in the case of a successful bid.
With a lot of properties clearing six figures in value, even a 10% deposit can be a significant chunk of cash. Property auction finance can help in a number of ways, starting long before you step into the auction itself. With auction finance, you can arrange the funding in advance, so before the hammer falls you know how much your budget is, and even what specification of property the lender will fund.
The first stage to getting auction finance is to plan what type of property you’d like to add to your portfolio, and find a specific auction to attend. Then you can draw up a shortlist of properties you’re interested in from that specific auction, and present the case to a lender.
The next step is to go through the lender’s provisional approval process, which might involve credit checks, property valuations, and a look at your income, for example. If you’re a seasoned developer, this should be a straightforward process. If you’re new to property development, you could still get auction finance, but you’ll have to make sure your proposal isn’t too ambitious. Talking to a finance professional might also be a really good way to find out if your plans are realistic or pie-in-the-sky.
With conditional approval from the lender, you’ll often have a set of criteria to follow for the property you’ll try to win at auction. For example, you might have an agreement in principle to finance 90% of a three-bedroom property worth between £200,000 and £225,000 — and in that scenario you’d need to fund the deposit yourself, which would be £20,000.
The criteria agreed with a lender might be more specific than that, or more flexible if you have a strong track record of previous developments. Once you have this agreement in place, you can start narrowing down your search for potential targets at the auction.
Once you’ve gone to the auction and made the winning bid on a suitable property (which is certainly easier said than done!) you’ll have to put down the deposit. From the day the deposit is paid you normally have four weeks (28 days) to pay the remaining balance. Of course, with auction finance in place, this is paid by the lender. If you reach this point, aside from the routine legal process, you’re funded!
Having said that, you can’t expect to put your feet up and wait for completion. You’ll need to keep in touch with the lender, the seller of the property, and your solicitor, to make sure things are progressing as they should. If all goes to plan and you’ve done the right research, you’ve just added a new property to your portfolio.
Auction finance is a great way to secure a property below market value prices, and this is often from a motivated seller. It could even be suitable for first-time developers if you understand property development finance.
Auctions can also be an intelligent way for real estate developers to buy property at reduced prices and are often critical to the success of a property development project.
However, auctions can be a riskier way to buy property when compared to the traditional approach. Properties are sold quickly, which doesn't leave buyers with much time for due diligence. Ensure that the auction house is authorized, regulated, and registered in England and Wales to protect yourself. Suppose the financial conduct authority holds the auction house, and you can identify the company registration number. In that case, you can probably trust that it's honest, fair and effective, so buyers get a fair deal.
Auctions are great for people to acquire unusual properties that estate agents wouldn't typically sell. With an expert eye, you can find a bargain. Properties at auction can be up to 30% cheaper than those bought through a regular sale. Some of the advantages include:
Less competition and a chance to bid if you're struggling to make an offer in time
Auction properties have a reserve that is lower than on the open market.
You can see the people you are bidding against in real time; a bidder can react to counterbids in more transparency.
Deals don't fall through due to delays.
Flexible methods of bidding (by proxy, by phone or online). Attending an auction event in person is the most popular way to buy property at auction, but technology is increasingly providing other options.
Depending on the type of property you are looking to acquire, auction finance might be the best option available. If you want to buy a property at auction but your working capital is tied up, auction finance could be a good alternative. Or maybe you've got positive working capital, but you'd like to expand your property portfolio.
Auction finance allows you to build your property portfolio even if most of your capital is locked into existing properties. In many cases, your credit history will be considered before bridging finance can be available.
You'll need to have the total purchase cost covered. If that means you need a mortgage—make sure you have a mortgage in place before bidding. Remember that you will be obliged to complete the purchase within 30 days. Hence, you will need to choose a lender that can provide the mortgage within the short window after the auction closes.
Also, keep in mind that at an auction, as soon as your bid is successful, you will be required to pay 10% of the purchase price as a deposit. Thus, you'll have to ensure you have the guarantee available at the auction.
The penalties for failing to complete an auction purchase within the agreed-upon time can be severe. For example, you could be liable for the costs of reselling the property and any difference between the price you agreed to pay and the final sales price. And, interest is applicable for each day it takes you to sell the property. Thus it is essential to ensure that all of your finances are ready to go before entering the auction room.
If you have a business that can meet its financial obligations, yes. Whether you are a sole trader, a partnership, a limited company, or a start-up - there are many kinds of auction finance available with a lender to suit every business need.
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Asset Lending & Property Team Lead
Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.
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