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Financing Property Auctions: Strategies for Success

By Edgehill Property Finance

Please note this article is intended to help you generate ideas and does not constitute financial advice of any sort.

Property auctions offer a fast-paced environment where investors can potentially secure properties below market value. However, the speed that makes auctions attractive also presents a significant challenge: financing. Unlike traditional property purchases with lengthy timelines, auction winners typically have just 28 days (or sometimes less) to complete the purchase after the gavel falls. This tight deadline renders standard mortgages largely unsuitable, necessitating specialized funding solutions. Auction finance, usually in the form of bridging loans, is specifically designed to meet these rapid completion requirements. Understanding how auction finance works, its benefits, risks, and the process involved is crucial for any investor looking to capitalize on auction opportunities.

Why Standard Mortgages Don’t Work for Auctions

Traditional mortgages involve extensive underwriting, affordability checks based on income and credit history, detailed property surveys, and complex legal processes. This typically takes several weeks, often months, making it impossible to meet the strict 28-day completion deadline common in UK property auctions.

  • Timing: Applying for a mortgage before an auction is risky; if you don’t win the bid, you’ve wasted application fees. Applying after winning is too slow.
  • Property Condition: Many auction properties are sold “as seen” and may require significant refurbishment, potentially making them unmortgageable in their current state (e.g., lacking a functional kitchen or bathroom, structural issues).
  • Certainty: Mortgage offers are subject to valuation and final underwriting, lacking the certainty needed when making a legally binding bid.

Auction Finance: The Bridging Loan Solution

  • Auction finance is essentially a type of bridging loan tailored for the speed and demands of the auction market.

    • Definition: It’s short-term funding used to bridge the gap between winning an auction bid and securing longer-term finance (like a buy-to-let mortgage) or selling the property.
    • Speed: The key advantage. Lenders specializing in auction finance can provide an Agreement in Principle (AIP) quickly (often within 24 hours) and release funds rapidly, typically within 7-14 days, well within the 28-day completion window.
    • Flexibility: Bridging loans can often be secured against properties that standard mortgage lenders might reject due to condition or type (e.g., uninhabitable properties, commercial units, land).
    • Funding Scope: Auction finance can often cover not just the purchase price but also necessary refurbishment costs.

How Auction Finance (Bridging Loans) Work

  • Loan Term: Short-term, usually ranging from a few months up to 12 or sometimes 24 months.
  • Interest Rates: Calculated monthly and are higher than standard mortgage rates due to the short-term nature and higher perceived risk. Rates can be fixed or variable.
  • Interest Payment Options: Interest can sometimes be ‘rolled up’ (added to the loan and paid at the end), ‘retained’ (deducted upfront from the loan amount), or serviced monthly.
  • Loan-to-Value (LTV): Lenders typically offer up to 70-75% LTV based on the property’s purchase price or value. A larger deposit (lower LTV) generally secures better interest rates.
  • Security: The loan is secured against the property being purchased. Additional security (other properties) might sometimes be used to increase borrowing or improve terms.
  • Exit Strategy: This is crucial. Lenders require a clear and viable plan for how the bridging loan will be repaid at the end of its term. Common exit strategies include:
    • Refinancing: Replacing the bridging loan with a longer-term mortgage (e.g., BTL mortgage) once the property is refurbished or meets standard lending criteria.
    • Sale: Selling the property (often after refurbishment for a profit – a ‘flip’).

The Auction Finance Process: Step-by-Step

  • Research: Identify potential auction properties. Thoroughly review the auction catalogue and, critically, the legal pack for each property (containing searches, title deeds, leases, etc.). View the property if possible, ideally with a builder or surveyor to assess condition and potential costs.
  • Budgeting: Determine your maximum bid price. Factor in the 10% deposit (payable immediately), auction house fees, legal costs, survey/valuation fees, bridging loan interest and fees, refurbishment costs, and Stamp Duty Land Tax (SDLT).
  • Arrange Finance in Principle (AIP/DIP): Approach a specialist auction finance lender or broker before the auction. Provide details of the property (or type of property) and your financial situation. Obtain an AIP confirming the amount they are likely to lend, indicative rates, and fees. This gives you confidence to bid.
  • Auction Day: Attend the auction (in person or online) and bid up to your pre-agreed maximum limit. Do not exceed your budget.
  • Winning Bid: If successful, you immediately exchange contracts and pay the 10% deposit and auction house fees. This is legally binding.
  • Formal Application: Immediately instruct your solicitor and submit your formal bridging loan application to the lender chosen at the AIP stage.
  • Valuation & Legals: The lender will instruct a valuation of the property. Your solicitor will handle the legal conveyancing work concurrently.
  • Loan Offer & Completion: Once satisfied, the lender issues a formal loan offer. Upon acceptance, funds are released to your solicitor, who then transfers the remaining purchase price to the seller’s solicitor on or before the completion deadline (usually 28 days from the auction date).
  • Implement Exit Strategy: Once you own the property, proceed with your planned exit strategy (refurbishment, letting, sale, refinancing) within the bridging loan term.

Key Considerations and Risks

  • Binding Contract: Remember, winning the bid creates a legally binding contract. Failure to complete means losing your deposit and potentially being sued by the seller for further losses.
  • Finance Certainty: While an AIP provides comfort, it’s not a guaranteed offer. Ensure you use a reputable lender with a strong track record in meeting auction deadlines.
  • Hidden Issues: Properties bought at auction are sold ‘as seen’. Thorough due diligence via the legal pack and viewings is vital to uncover potential problems.
  • Exit Strategy Viability: Your plan to repay the bridging loan must be realistic. Market changes could affect resale value or refinancing options.
  • Costs: Bridging finance is more expensive than standard mortgages. Factor all fees and higher interest rates into your calculations.

Conclusion

Financing a property auction purchase requires speed, certainty, and careful planning. While standard mortgages fall short, auction finance, typically through bridging loans, provides the necessary rapid funding solution. By understanding the process, securing finance in principle before bidding, conducting thorough due diligence, and having a robust exit strategy, investors can confidently navigate the auction room and potentially secure valuable investment opportunities. Partnering with experienced solicitors, surveyors, and specialist finance brokers is highly recommended to ensure a smooth and successful auction purchase.

References