1. How it works…
Your client will need to think carefully about finance before purchasing at auction. They’ll have to put down a 10% deposit on the day and then completion timescales are very tight. Buyers will usually only have 28 days to complete, sometimes even as little as 14 days. These timeframes can pose problems with a traditional lender so it’s here a specialist in auction finance can help.
Short-term finance can be arranged prior to an auction for a particular lot, up to an agreed bid price, so that they can be sure the funding is in place before they bid, to give greater confidence.
2. Is it only property professionals who buy at auction?
No, absolutely not. TV shows like Homes Under the Hammer have helped auctions surge in popularity in recent years by highlighting the rewards that a savvy auction investment can reap, as well as the range of opportunities available.
Whether it’s to add to a property portfolio, for a residential purchase, to buy a second property as part of a retirement investment, or for commercial premises, the demand for auction finance looks set to remain, and brokers are likely to deal with more auction purchases in the future.
3. Why brokers should use an auction finance specialist
Buying at auction requires fast and flexible lending and this is a major part of our success at Together. At auctions, where timescales are so tight, this is critical.
Specialists in auction finance will assess applications individually. For example, where a property is intended for renovation, many take into account the post-refurbishment value if appropriate. Specialists will also consider properties that a mainstream lender may not, due to their more restrictive criteria.
4. What are the main issues that would deter a mainstream lender?
The speed with which the finance has to be in place is a significant factor. Also, financing a property purchased at auction isn’t suited to many mainstream lender processes or underwriting skills. Experience, knowledge and understanding are essential to the decision making and can’t simply be a tick-box exercise.
For example, the property may need renovating, or could have complexities such as not having a kitchen or bathroom of a standard considered sanitary, which would often make it impossible to obtain a mortgage with a mainstream provider. It may need to be made watertight or even completely converted. These are only a few examples of the many issues that can make it hard to obtain finance from traditional lenders when it comes to auction purchases.
Knowing about these in advance means you can approach specialist lenders that are flexible and understand how to underwrite the individual circumstances when it comes to funding less standard properties.
5. Tips for brokers new to arranging auction finance
Check the legal pack
Each one will have differences relating to the particular property, so make sure your client has read the small print. It’s often here that surprises such as covenants, restrictions and rights of access are noted.
If there is planning attached to a property, check when it expires. Don’t assume you’ll be able to get it again – check the likelihood of renewing with the local planning department.
Many property professionals look to auctions to pick up houses of multiple occupation (HMO) investments, which are popular with buy-to-let investors. For larger HMOs however, the property has to be licensed with the local council. Make sure your client speaks to the local authority about what is required to avoid facing fines of up to £20k.
Don’t get caught out by the six-month rule
Banks generally won’t lend on a property until it has been owned for six months. However, what is less commonly known is that the vendor should also have owned it for at least six months. When buying at auction it’s important to find out how long the vendor has had the property, otherwise it could be an issue with a high street lender.
Investigate any tenancies
Look into the details of any tenancy agreements. Regulated or life tenancies can cause issues for finance as the tenant has the right to remain throughout their lifetime and can sometimes transfer the tenancy to a child, so make sure your client has checked it out.