How does auction finance work?

Jan 21

Buying a property at auction is a great way to get a property for development fast, and auction finance can help you get the money into your account within that quick timeframe.

Anyone who has ever purchased a property at auction knows that the secret is speed. The window of opportunity for buying the property you want is very narrow, and sometimes a chance will arise at a thoroughly inopportune moment.

When you purchase a property at auction you will be required to pay a 10% deposit on the day once you have won the auction, and then pay the rest of the balance within 28 days. If you do not have the necessary funds in your bank account, you might want to consider auction bridging finance.

Assuming your purchased property has a working bathroom and kitchen, and is therefore mortgageable, you may suppose that 28 days is enough time to arrange a mortgage, but banks do not move that quickly, and taking this risk means you are in danger of losing your 10% deposit. Auction finance on the other hand, is fast. It can usually be arranged in a matter of days; well within the 28-day timeframe. You will still need a 25-30% deposit, as up to 70-75% of the purchase price or Open Market Value (whichever is cheaper) is available through auction finance.

It is advisable to speak to a finance broker before you bid on the property at auction to discuss how likely you are to get auction finance on the property. This will be dependent upon a few different factors, including the location of the property (if it’s in a desirable area it will likely make more money once renovated), the nature of the property (how much will need to be spent in order to complete renovations), whether you’ve bought a property at auction in the past, and therefore whether you’re experienced at ‘flipping’ properties, how you plan to repay the auction bridging loan, and how much you intend to borrow. It will also depend upon your credit history, as auction finance lenders have similar lending criteria to banks, though the emphasis placed upon your credit history will be more limited than for a traditional mortgage.

Once you have purchased the property at auction, the bridging loan firm may arrange a formal valuation if they feel that one is required. After this has been completed they will make you a formal offer on your finance. The resulting paperwork will then be completed by qualified solicitors.

There are of course certain costs that come with auction finance, as with all short term finances. These will include an arrangement fee of approximately 2%, and the lender’s legal fees, as well as the cost of any valuation conducted on the purchased property. If you decide to use a broker, their fee is usually between 0.5 and 1%, and of course any solicitor whose services you engage would be at your own expense.

After the auction has been completed, the auction finance process should take no longer than 10 working days (sometimes as little as 7), and the finance will be in place for between 6 and 12 months. This could be an ideal situation if you believe that this is enough time to complete all planned renovations before either reselling or refinancing the property.

If you require any additional information on auction finance, the experts at Glenhawk will be happy to help. They specialise in short term finance, and will be sure to answer any lingering queries you may have. Find their contact details and website here: