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Bridging the gap

by: Guy Garrard
  • 22/02/2010
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As auction houses become more popular as a means to purchase homes, Guy Garrard explains the usefulness of bridging finance

Buying property at an auction is no new thing. This is a process that has been around for many years, but which has resided mainly firmly in the domain of professional investors, landlords and developers. However, the past decade or so has seen an increase in amateur involvement in the auction process.

This has been encouraged by the raft of property development shows we have seen on our TV screens, and many of these have helped to highlight the pros and cons of property auctions.

The variety of properties and land that come up for sale at any one auction is, generally speaking, large enough to satisfy the requirements of any type of potential purchaser. An auction catalogue often ranges from the sublime to the ridiculous in terms of size, opportunity and budget. Only a couple of weeks ago, an auction held in Latvia saw an entire town once used by the Soviet military as a base go under the hammer, if not the sickle. The deserted town formerly known as Skrunda-1 was auctioned off to a Russian firm for $3m (£1.9m) – about 10 times its list price, according to officials.

The lot included 45 hectares (111 acres) of land, 10 apartment blocks, two nightclubs, a shopping centre, a kindergarten, barracks and a sauna. The town was abandoned after Russian troops withdrew from Latvia in 1994, following the collapse of the USSR. Of course, I am not suggesting that your local auction house will have entire towns available every month, but it does go to show that you never know what might become available on any given day.

The lure of a bargain continues to draw those who may be looking to buy a run-down property to renovate for an onward sale or investment and as a result the popularity of the auction process continues to rise. Indeed, according to a recent report from Countrywide, four out of five properties at most auctions are now sold on the day, compared to last year when less than half of those on offer would have been snapped up.

Technological advances are also looking to extend the scope of the auction process. Following similar initiatives in the States, property website Zoopla.co.uk has recently launched a live online property auction platform for buying and selling residential property, in partnership with auction firm Real Estate Disposition Corporation.

The first online auction of approximately 150 homes took place in early February over a four-day period. Initially focused on repossessed properties, the service will also shortly be available to estate agents across the UK, providing them a new, fast and effective additional route to market for any of their property listings.

Auctions are often used by lenders to sell repossessed properties, as well as by developers, investors and owner occupiers who need to achieve a quick sale. The attraction of the auction process to vendors is that it can offer the certainty of a sale on a specific date and the purchaser, or the vendor, cannot change their mind once the hammer has fallen, as the sale is contractually binding. Although a key benefit of auctions is the speed of completion – contracts are exchanged immediately and completion is usually within 14 to 28 days – financing the deal can pose problems.

Mainstream mortgage providers are generally not very flexible in their ability to accommodate such short timescales, especially not in the current financial environment, and although pre-auction mortgages are available, they incur additional expense in the absence of security. It is often the case that many auctioned properties are in need of some strong levels of investment in order for them to become habitable. With lenders more likely to place a retention on the property, this can place a stumbling block in terms of getting the necessary finance in place for completion.

This is where the option of bridging finance fits into the equation. There are a number of short-term finance specialists that can give the auction buyer access to a funding package to ensure the auction buying process is a simple one. As previously alluded to, buying at auction usually means having to operate within very limited timeframes and a bridging loan can help facilitate this process to allow the successful bidder to complete within the required period of time.

Some finance specialists can provide up to 100% of purchase price, as their LTVs are based on the property’s actual value, allowing the buyer to complete the transaction within these time constraints until they get their long-term finance in place or to simply bridge the gap if their arranged funds fall short of their final bid.

This will allow potential purchasers to attend the auction in the knowledge that funds, subject to valuation, are available to seal the purchase. Of course a deposit is required on the day of the auction itself, but funds could be in place within 24 hours to ensure the completion of the property transaction can be made.

The prospect of losing the property or deposit because of such administrative delays will prove frustrating and ultimately cause a great deal of extra time and expense to the purchaser.

However, in spite of these challenges there are still excellent opportunities for savvy investors to buy property at auction at a lower price than an individual property may actually be worth.

Combine this with a growing degree of positivity surrounding the whole property market, and it has certainly been reflected by the demand for bridging finance in relation to properties being bought at auction. Of course, bridging finance is not the best option for everyone but it does provide a valuable option for those looking to secure short-term funds quickly.

Bridging finance is certainly not a new area of the market for intermediaries but changes in financial requirements dictate that the sector is now becoming an increasingly valuable tool in any offering. Historically, the perception of this sector has been poor but firms are working hard to try and cast aside these shackles and prove the true value of the benefits offered by this type of lending scenario.

Unfortunately, there are still some intermediaries who don’t know how best to use a bridging loan. Many enquiries fall down at the first hurdle – understanding what the customer needs – but this is also often as a result of the customer not being aware of what is required to complete the transaction or how the process is handled.

This is why intermediaries looking to place business need sound training and extensive product knowledge in order to make this facility benefit their client. If a broker has a client who wants to buy at an auction, it is worth fully evaluating the bridging option and engaging the loan provider to see what options might be available. It might not only help the client in question secure a particular property at a knockdown price, but also provide a good source of incremental income for the broker.

Guy Garrard is head of business development at Tiuta

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