If you are looking to get onto the property ladder, there are a number of routes that you can take, from purchasing an existing property, bidding at auction or even developing a commercial or residential property on existing land.
If a developer wants to secure a property for a low price, they will often choose to purchase it at auction. However, purchasing a property at auction isn’t as straightforward as Homes Under The Hammer might have you believe, and it comes with its unique challenges.
From time constraints to rigid financial requirements, it can be difficult to secure a property at auction without the right support in place. When purchasing a property at auction, it is more than likely that you will require auction finance, so working with a principal lender, such as Bridging Finance Solutions, is essential.
In this blog, we will provide all the information you need about buying at auction, covering the importance of auction finance and answering any questions you may have.
What is Auction Finance?
Auction finance provides financial assistance to cover the remaining balance for properties purchased at auction and is a type of finance solution rapidly growing in popularity.
Auction finance interest rates typically span from 0.43% to 0.95% per month, although they can greatly fluctuate depending on the loan-to-value (LTV) ratio, type of property, and the lender’s risk assessment.
At Bridging Finance Solutions, we are leading auction finance lenders, so we are more than familiar with the auction process and what is required to obtain auction finance.
Why Auction Finance is Essential
When you purchase at auction, you do not have the same time scale as you may have with other purchase types. Buying at auction is a quick process, so if you don’t already have the funds together, you need a solution to provide you with the finances quickly.
How to Prepare For an Auction
If you intend to go to an auction to purchase a property, it is essential that you take the time to prepare. To prepare for an auction, you should have an understanding of how it works, which means that you should do the following:
Do Your Research
Explore the catalogue, evaluate the property, and familiarise yourself with the difference between the guide and reserve prices.
Arrange Finance in Principle
It’s recommended to consult with a bridging lender before placing a bid. This can provide valuable insights and help you make informed decisions during the bidding process.
Have Your Legal Team Ready
It is essential to have the legal pack reviewed before auction day. This ensures that you are fully informed about the long-term terms and conditions associated with the property.
Know Your Budget
Several key elements should be considered when creating a budget for a property purchase. Start with the property’s purchase price and include any applicable fees, such as legal or closing costs.
You must also factor in stamp duty, which can vary by location. If renovations are necessary, estimate those costs as well. Lastly, don’t forget to account for financing expenses, such as interest and loan fees.
Types of Auction Finance
While property auction finance bridging loans are the most suitable and common solution for purchasing property at auction, they are not the only option available. Continue reading to discover more about auction bridging loans and other financing alternatives.
Auction Bridging Loans
When purchasing a property at auction, you need to act fast. You are expected to pay a deposit on the day of purchase, and the balance is due 28 days after that. (check terms as there are occasions when this timescale is reduced)
Auction bridging loans cater to the urgent funding needs of auction purchases, ensuring bidders receive financial support quickly. Interest rates for auction finance generally range from 0.43% to 0.95% monthly, but they can vary significantly based on factors like loan-to-value (LTV) ratio, property type, and the lender’s risk evaluation.
Pre-approved Mortgage Offers
If you want to purchase a property at auction, you can use a pre-approved mortgage to complete the purchase.
To do this, you’ll need to apply for a mortgage in principle or a pre-approved offer. Even if you secure the initial finance, if the property you purchase is not in good condition or simply doesn’t meet the lender’s expectations, the lender may refuse the mortgage, which adds a layer of risk to your purchase.
Understanding the Auction Finance Timeline
As you can see, auction finance is often the best solution for purchasing a property at auction, but you must take steps to secure the finance in time to complete your auction purchase.
Pre-auction Approval
Before attending an auction, it is wise to obtain pre-approval on your loan. This gives you the ability to confidently bid on your properties with the knowledge that finance is already in place. This part of the process is essential for knowing precisely how much money you have to invest in property.
Successful Bid
When your bid at an auction is successful, you must pay a deposit of 10% right away, usually on the same day. Additionally, you will be required to sign a legally binding contract that commits you to finalising the purchase, typically within 28 days. (less than 28 days is also sometimes required)
Loan Offer Confirmed
Once your bid is accepted, you need to inform your lender of the confirmation. This will move your application to the formal offer stage, where the lender will value your property, assess your finances, and begin the conveyancing process.
Once all of the necessary checks have been completed, your offer is officially confirmed, and the appropriate paperwork is provided.
Release of Funds
Upon completing the necessary paperwork and contracts, funds will be released; you can then use the funds to pay the additional cost of your auction property. This will happen within the 28-day deadline, especially if you are working with a company such as Bridging Finance Solutions, as we have a reputation for releasing the necessary funds in readiness of your deadline.
What Can Auction Finance Be Used For?
Auction finance can be incredibly versatile and usable across a variety of purchase needs. Some projects that can be funded with the support of auction finance include:
Residential and Commercial Properties
Auction finance can be used to purchase both residential and commercial properties. It is not uncommon for people to purchase properties at auction to use them for rental income, and the loan can cover the cost of the purchase as well as any required renovations.
Auction finance can also be a valuable tool for acquiring buy-to-let properties. This type of financing is specifically designed to help investors secure funding quickly, enabling them to participate in property auctions and capitalise on potential investment opportunities.
Renovation Projects or Inhabitable Properties
If the property you are looking to purchase requires a lot of work or is considered inhabitable, traditional mortgages may not be available.
However, auction bridging loans can be used to renovate or refurbish properties in poor condition or completely transform properties that may not be eligible for a mortgage.
Land With or Without Planning
Auctions are not just for selling property; land can also be purchased at auction. Access to auction loans enables buyers to act quickly and acquire land, even if it has not yet received planning permission. Bridging Finance Solutions will not lend unless Planning Permission has been granted.
The Cost of Auction Finance
Like any loan, you should always be prepared to pay additional fees on top of the cost of your auction loan. When taking out auction finance, you can expect to pay:
Auction Bridging Interest Rates
Auction finance interest rates typically fall between 0.43% and 0.95% per month. Still, they can differ significantly depending on factors such as the loan-to-value (LTV) ratio, type of property, and the lender’s risk assessment.
Arrangement Fees
Before finalising any agreement, it is essential to be aware of any arrangement fees. The lender imposes this fee, generally indicated as a percentage of the total loan amount, to set up the loan.
The fee tends to be deducted from the loan amount, but how the payments are handled is up to the lender’s discretion.
Legal and Valuation Costs
When taking out auction finance, it is essential to consider any possible legal and valuation fees. The lender evaluates the cost of the property and charges the borrower legal fees.
These are typically necessary upfront costs that must be incurred whether or not the loan is finalised.
Redemption Fees
Though you may think that paying your loan quickly will work in your favour, the truth is that when you pay your loan off before the end of the agreed-upon term, you may have to pay redemption fees.
Redemption fees are designed to compensate for the loss of interest payments, providing the lender with money that they may have lost out on. The cost of these redemption fees is at the discretion of the lender.
Benefits of Auction Finance
Some of the benefits of auction finance include:
Fast Funds Access
Auction finance is designed to be fast, with funds delivered in a matter of days. When completing a purchase at auction, it is important that you have quick access to your funds.
When purchasing a property at auction, there are a lot of tight deadlines that you have to worry about meeting, so the speed provided by auction finance gives buyers the tools needed to quickly secure their purchase.
Flexible Lending Criteria
As we have already covered, auction finance can be used to fund a range of projects, providing great flexibility.
Lenders can consider factors beyond credit scores, meaning that they can finance projects that a typical lender may avoid.
Common Pitfalls of Auctioned Properties
Before rushing into the bidding on a property at auction, it is essential to be aware of the potential pitfalls you may encounter during the process. These pitfalls may include:
Underestimating Renovation Costs
With the excitement of property auctions and the fierce competition you often face, it can be easy to rush into a purchase without thinking clearly about the potential renovation costs you are undertaking.
When purchasing a property, it is essential to factor in any unexpected costs and try to avoid ‘auction fever’ when possible. It is also recommended that you consider professional advice at this stage.
Insufficient Due Diligence
If you do not carry out your due diligence before bidding on a property, you may risk significant financial losses and legal complications. Properties sold at auction may have hidden costs that are not apparent upon first glance, such as structural damage or outstanding debts.
It is advised that you should complete a property inspection and review the legal pack provided by the auctioneer.
The legal pack will be the best place to identify any possible issues or problems, but if you’re unaware of what to look out for, a solicitor can advise you.
Financial Delays
Depending on how you source your money, your purchase of an auction property may face financial delays. After your initial deposit, you have just 28 days to provide the rest of the money for the property, but there may be delays if the provider decides not to back the venture.
This emphasises the importance of having a clear financing plan, which helps you avoid difficult financial situations. Before making an auction bid, working with lenders like Bridging Finance Solutions can ensure your financial security.
Title Issues
Many title issues may arise when purchasing a property at auction. For example, there may be problems with the seller’s title, or even local land charges or covenants that you are expected to pay.
Hidden building control issues and unresolved disputes may also surface after the purchase, impacting your ability to use the property freely. This is why we will always advise clients to work closely with solicitors, as they can help to uncover any of these hidden issues.
Planning Constraints
As already mentioned, when a property is available at auction, it will come with a legal pack. When considering any property purchase, it is essential that you familiarise yourself with these legal documents.
Legal packs often contain the existing planning permissions available on the property. Before committing, you can check that these permissions align with what you want to do with the property.
Everything You Need to Know About Auction Finance With Bridging Finance Solutions
If you still require auction finance, you must work with a lender you can trust to provide the financial backing you need to secure your property at auction.
Bridging Finance Solutions specialises in auction bridging loans, offering expert assistance for those looking to secure financing for property auctions. If you’re thinking about partnering with us, here’s some important information about our expertise and what to expect when buying a property at auction.
How Quickly Can Auction Finance be Arranged With Bridging Finance Solutions?
At Bridging Finance Solutions, we pride ourselves on being able to provide the necessary finance quickly and efficiently. We have been able to provide the required finance for our clients in a matter of days; it all depends on how quickly you can provide us with the necessary information.
What Deposit do I Need on Auction Day?
Participants must deposit at least 10% of the final bid price on the day of the auction. This deposit must be paid in cash or through cleared funds on the same day as the auction. Finance will be provided on the balance of funds required, up to a maximum of 70% of open market value, or 85% of the purchase price (whichever is lower of the two)
Can I use a Regular Mortgage For an Auction Property?
While it is possible to use a standard mortgage to purchase an auction property, these properties often require quick completion. This means you must secure your full mortgage amount swiftly, which isn’t always feasible. As a result, many people opt for bridging loans.
What Happens If I Can’t Complete My Purchase Within 28 Days?
If you cannot finalise your auction purchase within 28 days, you may encounter significant repercussions, which can include losing your deposit and facing possible legal claims for damages. Additionally, the seller may seek compensation for any losses resulting from your breach of contract.
Is Auction Finance More Expensive Than Standard Bridging?
Because auction finance tends to have a shorter turnaround time, it can be considered more expensive because of the interest associated with it. However, it is well worth it for the quick financial injection.
Make it Happen With Bridging Finance Solutions
Through this blog, we hope to have provided more insight into what to expect when securing property auction finance. At Bridging Finance Solutions, we are leading property finance lenders, and we have helped countless clients secure properties at auction due to our financial contribution.
If you want to purchase a property at auction, contact us today to learn how we can help.
