Property Auction Finance

Buying a property at auction can be an exciting and potentially lucrative way to secure your next investment. However, it’s essential to understand the process, benefits, and risks involved before diving in. You might associate auction property purchases with a cash buyer, but this isn’t the only way to buy a property at a property auction.

Cash buyers contend with buyers backed by a finance lender (bridging loans also known as auction finance) to purchase the property, which means there is a great opportunity for many people.

In this comprehensive guide, we’ll walk you through the key aspects of buying property at auction in the UK.

Types of Property Auctions

There are two main types of property auctions, and knowing the difference between the two is essential.

Traditional Auction

In a traditional auction, properties are sold to the highest bidder, and as soon as the gavel falls, parties exchange contracts immediately. This means you are in a legally binding contract. The successful bidder must put down a 10% deposit on the day and complete the transaction within 28 days.

Modern Auction Method

The modern method allows more flexibility, with buyers paying a reservation fee (typically around 5%) to secure the property. The completion process is extended, with 28 days to exchange contracts and an additional 28 days to complete the purchase.

Understanding Auction Prices

Before bidding, it’s crucial to understand the different prices you’ll encounter:

Guide Price

Agreed and set by the seller and buyer, this price reflects recent sales of similar properties and the property’s condition. It’s a marketing figure to generate interest.

Reserve Price

The reserve price is the minimum price the seller will accept, but it is not disclosed to bidders. While potential buyers aren’t informed of the reserve price, they might receive a guide price, which helps them make an informed bid along the lines of what the seller expects. The reserve price has to be within 10% of the guide price (above or below).

Sold Price

The winning bid price, which is typically 15%-25% above the guide price.

To avoid overpaying, set a budget and run figures in advance to ensure the property remains profitable.

Financing Auction Properties

Securing traditional mortgages for properties at auction can be challenging due to the tight completion deadlines. Auction Bridging finance has become a popular alternative, offering several key benefits:

Speed

Funds can be arranged quickly, allowing completion within the 28-day timeframe.

Flexibility

Auction finance also known as Bridging loans ,can be used for various property types and conditions, including unmortgageable properties.

Borrowing Power

Typically, you can borrow between 65%-70% of the buying price (or upto 100% if using additional security), with the potential to finance up to 100% of the refurbishment costs as well.

Short-term

Auction Bridging finance is usually arranged for 9-12 months, with options for early repayment without penalty.

Auction Finance

Auction finance refers to the various financing options available to buyers when purchasing a property at auction. These options are designed to accommodate the unique requirements of auction purchases, such as the need for quick funding and flexibility in terms of property types and conditions.

This type of finance can also be known as Auction Bridging Finance or Property Auction Finance. People will typically use the finance to help them purchase the property and then either sell once refurbishment has been completed or then refinance to secure a longer term finance solution, such as a mortgage.

Associated Costs to Consider

When budgeting for an auction purchase, factor in these costs:

• Valuation fees.
• Legal fees.
• Application and broker fees.
• Auctioneer fees.
• Monthly interest for borrowing the money.
• Lender Fees.
• Refurbishment and contingency funds.

 

It’s essential to be aware of all expenses, as they can significantly impact your overall budget. Valuation fees are charged by surveyors who assess the property’s condition and market value, providing you with a clear picture of what you’re purchasing. Legal fees cover the cost of conveyancing, including searches, contract reviews, all manner of legal documents and completion formalities.

If you’re using a broker to arrange finance, there may be application and broker fees to consider. Auction houses also charge administrative fees for their services, which can vary depending on the auctioneer.

Finally, it’s crucial to allocate funds for any necessary refurbishments and to have a contingency budget in place to cover unexpected costs that may arise during the process. By factoring in these additional costs involved, you can ensure that you have a realistic budget and avoid any financial surprises down the line.

Staying Aware of Upcoming Auctions

It is helpful for prospective buyers to stay up to date with leading auction houses. You can do so online and requesting an auction catalogue should ensure you are informed as well as you can be, before a property is placed for sale.

Have a maximum price in mind to be the winning bidder

Preparation is vital in making a successful bid, and can help you manage a bidding war on auction day. Studying the auction pack, speaking with auction finance lenders and knowing what represents a fair price or the highest bid you can justify will help you triumph when the hammer falls.

Also, make sure you understand the process to minimise the chances of you falling foul of uncertain buying procedures.

Preparing for Auction House Success

1. Conduct thorough research on the property, location, and market conditions.

2. Have a clear exit plan, whether it’s selling, refinancing, or holding the property.

3. Read and understand the legal pack, seeking professional advice when needed.

4. Assemble a trusted team, including a solicitor, broker, and surveyor.

5. Set a firm maximum bid based on your figures, and stick to it.

Successful auction purchases rely heavily on thorough preparation. Before bidding, it’s crucial to research the property, its location, and current market conditions to ensure you’re making an informed decision.

Do a property search and arrange viewings if you can

This includes visiting the property (if you can), assessing its condition, and investigating any potential issues or limitations. If the property is a renovation project, you’ll have different expectations than buying a house that is habitual immediately.

Having a clear exit plan is equally important – whether you intend to sell the property, refinance it, or hold it for an extended period, your strategy should be well-defined before committing to a purchase on auction day.

Consider all aspects of the legal pack

The legal pack, provided by the auction house, contains vital information about the property, including title deeds, searches, and any special conditions of sale. It’s essential to thoroughly review this document and seek professional advice from a solicitor experienced in auction purchases to ensure you fully understand the implications and obligations involved.

Assembling a trusted team of professionals, including a solicitor, broker, and surveyor, can provide invaluable support throughout the auction process. Their expertise can help you navigate legal requirements, secure appropriate financing, and assess the property’s condition and value.

Finally, setting a firm maximum bid based on your figures is crucial to avoid overspending. Determine your budget by factoring in the purchase price, additional costs, and potential refurbishment expenses, and stick to this limit during the bidding process. By following these key steps and seeking professional guidance, you’ll be well-prepared to tackle the auction process and secure a successful property purchase.

Buying a property at auction can be a smart move for investors, but it requires careful preparation and professional guidance. By understanding the process, costs, and financing options, you’ll be better equipped to make informed decisions and secure a successful purchase.