A brokers guide to auction finance and purchasing at auction
By Tiba Raja
Since 2018, and throughout the COVID 19 pandemic, there has been a noticeable rise in the number of brokers seeking finance to support a property purchase at auction for their client.
Given the competitive nature of the real estate market, the rising popularity of auctions should come as no surprise.
Not only are transactions immune from gazumping and gazundering tactics, there is also a set completion period of just 28 days* once a 10% deposit has been paid.
As well as this, many auctions have moved online. Allowing buyers to more easily access these properties from the comfort of their own home.
Bridging and auction finance can help your client purchase:
- Residential investments, Including HMO’s & Multi-lets
- Refurbishments for auction property
- Semi-commercial properties
- Commercial properties
Property auctions are becoming a popular option for all types of buyers.
The speed with which transactions are handled means investors are able to act confidently, while the nature of the price being determined on the day means there is always a chance of getting a property at well under market value.
However, the ultimate success of a property purchase at auction depends on the buyer having the necessary finance at their disposal.
Using bridging loans to purchase at auction
Completing a property within such a limited time span can be tricky with a traditional mortgage, even more so if the client is looking to use commercial or more unusual property as security for the loan.
Auction loans, which can also be called ‘bridging loans’ are considerably quicker, with completions available in as little as three days, even with complex circumstances.
Lending periods can range from 3 – 24 months, and dependent on lender, there may be no early repayment charges.
This means that if circumstances change then you can exit at an earlier date that works best for the client.
Who can use an auction loan?
Auction loans are available to individuals and businesses alike e.g. Limited, LLPs, SPVs, Offshore etc. and for an array of circumstances:
- Discharging adverse credit
- Exiting IVAs
- Repairing CCJs
Loans will require an exit plan, which can be through refinancing, re-mortgaging or even refurbishing and then selling the property on.
Loans can be set out around the client’s personal financial position to make sure that it works for them.
The property auction checklist
Those who have never taken part in an auction can find the process complicated and risky.
The success of a transaction depends on a number of factors, such as quick access to auction loans which we have mentioned.
So, what do homebuyers need to consider before, during and after a property auction?
We called upon Stuart Elliott from Network Auctions to hear what he considers to be the quintessential property auction checklist.
Having worked in the property industry for nearly 30 years, Stuart has seen first-hand the changing nature of real estate auctions.
As a Fellow of the National Association of Valuers and Auctioneers, Stuart believes that when it comes to successfully bidding on a property, brokers need to ensure that their client follows a six-point checklist:
1. Always encourage your client to view the property – you would be surprised how many people do not, he says.
Whilst we understand that COVID19 has made this difficult, virtual viewings are on the rise, and are still a good way to see what it is that is being purchased.
2. Make sure your client does their research and understands what the market value of the property is by consulting with agencies and online property portals.
They will need this to access an auction loan. Part of this is understanding why the property is being sold at auction – what happed to the previous owners, was the property on the market previously? Did it have any offers?
3. Always download a copy of the ‘Legal Pack’ from the auctioneer’s website. Read it, or if your client is new to auctions, encourage them to instruct a solicitor to check the legal pack on their behalf.
This contains all the legal information relating to the property and any additional costs that the purchaser will be liable for.
These additional costs will be stated within the ‘Special Conditions’ of the legal pack. Purchasers should be aware that it is their responsibility to read it as the contents are legally binding.
4. Inform the lender of the timescale required for the funds to be deployed as soon as possible.
Remember, the purchaser must provide a 10% non-refundable deposit on the day of the auction, and complete in 28 days, and this is not protected under the consumer contracts regulation.
5. Successful bidders are charged an administration fee by the auction company so be sure to check the amount. This typically sits around £750* (plus VAT).
6. Remind your client that they should have a maximum price they are prepared to bid to on the day of the auction and stick to it – If they go over this, this could affect the LTV of their auction finance solution and they risk their lender pulling out.
Understanding how property auctions can work for your client
To make sure brokers are well equipped to support their clients at property auctions, MFS spoke with Phillip Arnold of Phillip Arnold Auctions to hear his thoughts on the common pitfalls of auction purchases, and the benefits of bridging loans.
He stressed that while auctions have become a popular avenue for seasoned investors looking to expand their portfolio, there are also many common pitfalls facing buyers who have not undertaken the necessary due diligence.
Indeed, of all the risks involved when buying a property at auction, Phillip believes there’s one challenge that stands above the rest:
“In all my years working in the industry, you would be surprised to find out just how many buyers do not do sufficient research before bidding on a property.
And this is despite the strong advice given by lenders, brokers and auction professionals to do all the necessary research and background checks.”
So, what can brokers do to make sure their clients are adequately prepared?
“Legal packs hold all the necessary information the buyer should need. It is also important to check local house prices so that when it comes to bidding, they do not end up paying beyond the actual value of property.”
When it comes to financing an auction property purchase, a lot of buyers can be caught out by the fact that contracts need to be completed within 28 days of the gavel falling.
This makes it extremely important for brokers to understand the different finance options that can be used.
And of those available, Phillip recognises the benefits of bridging loans being used as auction finance, due to the speed and flexibility with which funds can be deployed.
“Bridging loans are a good choice for those hoping to buy at auctions. A pre-approval gives the buyer added peace of mind; he or she knows they can bid, and if successful, complete within the 28-day cycle.
In other words, it gives the buyer time to purchase a property while at the same time work on the longer-term finance in the background.”
Busting the biggest property auction myths
Importantly, a lack of knowledge about auctions can lead to misconceptions about how property purchases through this medium are handled.
To tackle these misconceptions, MFS consulted with its experienced team of underwriters and business development managers to find out what they considered to be the biggest property auction myths.
Myth 1: Auctions are too complicated and risky
Property purchases are by their very nature a complicated process, and buyers can fear the prospect of bidding, paying a deposit and exchanging contracts all within a 28-day window.
In reality, auctions are transparent and significantly reduce the risk of a buyer being gazumped or gazundered at the critical closing stages of a sale.
Once the highest bid has been placed and accepted by the seller, there is no risk of the sale collapsing as a result of the seller pulling out.
It also gives the buyer the assurance that the deal will not be delayed beyond 28 days.
Myth 2: Auctions are only for buy-to-let investors
It is certainly true that auctions are popular amongst buy-to-let investors seeking to purchase and renovate a derelict or run-down home.
Typically, they do so with the objective of putting it back on the market to sell or rent. However, while our underwriters regularly encounter this situation, it is important not to think auctions are limited to this type of investor.
For example, first-time buyers are able to purchase a property at auction; however, given the limited timeframe it is extremely important for them to have their finances in order.
Bridging loans are positioned to help first-time buyers – lenders like MFS can value a property a buyer intends to bid on prior to the auction, and once determining the market value, can issue a bridging loan.
Myth 3: Auctions are only for run-down properties
Following on from this point, there is similarly a perception that auctions are only suited to investors looking for derelict and run-down properties.
While it is true auctions are commonly used to sell repossessed and derelict homes, prospective buyers are in-fact able to buy a whole host of different properties.
This can range from commercial and semi-commercial developments to luxury properties and traditional residential homes
Myth 4: If the Reserve is not met you can’t buy the property
If you are still interested, you can sometimes speak to the auction team and you may be able to negotiate directly with the seller.
Auction Finance FAQ
Are you curious about auction finance? We’ll give you the key information about using a bridging loan at an auction.
What is auction finance used for?
Ultimately, auction finance is used for auction purchases. It is designed to be fast and to allow you to complete the purchase quickly.
How does auction finance work?
Auction finance is a specific type of bridging loan for buying a property at an auction, and is similar to getting a mortgage in some ways but is completely different in others.
What properties can you buy with auction finance?
It is in the name – for auction properties. Normally this is a property that hasn’t sold quickly, meaning that you can sometimes pick something up below market value.
Tiba Raja is a specialist in both banking and finance, having worked at Aviva, HSBC’s Investment arm and Goldman Sachs before launching Market Financial Solutions in 2006, where she works persistently in the background as Executive Director. Tiba is an expert in strategy and business development, as well as being dedicated to philanthropy – focusing mainly on children’s charities.
*This can vary dependent on the auction house. This should be checked before a property is purchased