A major consideration when it comes to the purchase of a property at auction is the tight timescales within which a client would be required to complete.
Under typical auction conditions (though this can of course vary depending on the auction house), if a client’s bid on a property is successful, they would be required to pay a non-refundable 10 per cent deposit on the day and would usually have a further 28 days to complete the purchase.
These timeframes can pose problems for traditional mortgage lenders, so it’s vitally important for a buyer to partner with a specialist in auction finance if they are to be successful in purchasing at these events.
The funding for the purchase of a property at auction can be structured in numerous ways, each one dependent on a buyer’s circumstances, situation and financial requirements.
A specialist adviser will look to tailor a funding solution to the individual client’s needs. This could include utilising a client’s other property assets as additional loan security.
That often means a borrower’s personal or business cash contribution to the purchase price is reduced to just the 10 per cent deposit paid on the day of auction and the subsequent valuation and legal fees associated with the purchase.
Renovation and refurbishment
It’s not uncommon for properties sold at auction to require an element of renovation and refurbishment.
In fact, many auction buyers would be looking at exactly these types of properties in order to make a quick turnaround and profit on the scheme.
Though not always the case, one of the reasons these project properties are being sold at auction is because they would typically be deemed as unsuitable security for standard mortgage lenders.
In this situation, the subject property would usually require works inclusive of modernisation, the fitting of a new kitchen or bathroom perhaps, or in some circumstances, a complete redevelopment of the property.
This might include an extension to the existing property or a total internal restructure, for example, if the borrower intends to change a standard residential property into a high multiple occupancy (HMO).
It is therefore imperative from the outset to understand what a client’s intentions are with the purchase property so their requirements are matched with a lender who can deliver the required light or heavy refurbishment loan facility, within the restrictive timescales of an auction.
Cost of works and exit strategy
In addition, the cost of the works to the purchase property, if required, are just as important as the actual purchase price itself and must be considered when sourcing lending options for an auction buyer. The successful repayment of a loan facility can be entirely dependent on the completion of the works required.
A client should be clear about their exit strategy for the short-term loan they are looking to apply for.
This would usually be through a refinance onto a longer-term product, the sale of the property, or a possible combination of both if additional securities have been offered as part of the loan structure.
Preparation can be the key to a successful auction purchase and can significantly reduce a borrower’s risk of not being able to complete on their purchase.
It’s important that a client has read the legal pack associated to any property they are considering buying, which should include information about any covenants and any planning consents that are attached to the property.
This allows the client to make an informed decision as to whether or not to proceed with a bid on the property on the day of auction.