What is Auction finance
Put simply auction finance is a short term loan provided by a lender ignorer to secure a property at auction. Naturally given the circumstance that an applicant will require the funding solution for they will require the loan at speed. Given that typically once a property has been purchased at auction the new owner will have a maximum of 28 days to complete its easy to understand why speed is extremely more important than on a conventional bridge as the new owner will be subject to charges from the auction house if the purchase can not complete within these time frames.
How is a property auction loan structured
Once the gavel comes down and the new owner of the property has been approved by the auction house they will first need to pay a 10% deposit on the day. The new owner will also need to sign a legally binding contract that they will complete the full transaction within 28 days. It is at this point where the property auction loan will either be utilised as it has been put in place prior to the auction, or the new owner will now seek funding from a lender to meet the remaining balance.
Funding from the new owner’s perspective can take a number of forms due to their intention for the property. They can look to acquire the finance to simply fill the funding gap prior to re-mortgaging the property should they be looking to live in the property. They can look for a purchase and development loan should they be a developer (essentially they will be taking on two loans within the facility) and be looking to undertake renovation on the property over a period of time for which they either intend to sell as an exit strategy or to then live in (dependent on the end goal in this scenario will determine if the loan is regulated or unregulated).
Whatever the end goal is the new owner can secure auction finance from numerous lenders from across the market which can be used to complete on land, residential properties, buy to lets, commercial and semi-commercial buildings.
How is the interest calculated on property auction finance?
One of the most common ways to structure a property auction loan is to apply the interest monthly, however, this is not the only way that a lender could structure the facility. A brief overview of each repayment method is listed below:
- Montly: as is common practice you will make interest payments across the full loan term every month based on the rate from the lender and you will repay the full loan amount at the end of the agreement.
- Retained: With this loan structuring the lender will calculate the interest for the full term by adding all of the monthly payments together, you are effectively lending the interest for a set period of time.
- Rolled up: All interest are accumulated and added to the loan at the end of the agreement, at the end of the loan the complete loan amount and rolled up monthly repayments will be repaid.
What are the advantages of auction finance
– The provide a great opportunity to secure residential and commercial property at below market prices
– You can use auction finance to secure an auction property both pre and post auction
– You will be able to drawdown funds to complete the purchase in days not weeks (dependent on lending provider)
– You will only have to put up between 10% – 25% to fully purchase a property with the aid of auction finance
– Generally properties from auction represent a greater ability of capital uplift
– Underwriting process can be one of the quickest
What are the disadvantage of auction finance
– Your 10% deposit is none refundable
– You must secure finance within 28 days of securing the property
– You have no legal rights to the property if you fail to complete in 28 days
– If your finance falls through you still have to secure another funder before the 28 days expires
What are the alternatives of auction finance
The reality is that auction finance can also be classified as a property bridging loan due to the nature of what the loan is being required to facilitate. You can opt for a purchase and development loan but due to the underwriting that can be involved in a development loan speed to draw-down can be an issue for securing an auction property via this type of funding. In circumstances like this where a developer looks to acquire a loan for the purchase and development of an auction property what can often happen is the lender may include two facilities under the one loan. There would be a loan delivered at speed to secure the property and then the development loan which would include a lengthier drawdown process which would include the obligatory valuations hence lead to a longer time to drawdown.
What do I need to know about auction finance
– You are able to apply for an auction loan both pre and post-auction. Having a loan in place prior to the auction is known as having an agreement in principle. Once the property has been secured you would then progress the loan.
– Auction finance can be quicker to secure as the lender can secure funding based on fewer initial checks, for instance, the lender may not require income history, also business plans may not need to be submitted dependent on the exit strategy. Based on the security the lender is putting into the loan i.e. are they putting more in than the initial 10% deposit etc they could benefit from additional incentives.
– Alternative specialist enders i.e. not from the high street will be far more likely to provide auction finance for properties in a state of disrepair and or are an unconventional property type.
– Auction finance can be available on average from 6 – 18 months.
– Alternative lenders will also consider properties which require heavy refurbishment and even land which has planning for ground-up development.
– Typically lender will look for between anywhere from 50% – 75% of the loan to value of the property, naturally this leaves a shortfall for securing the property so the lender will be expected to fulfill this shortfall.
The importance of planning & research
Given the level of investments involved with purchasing property undertaking significant research of not just the property but also the area is key to not just your maximum offer but also your exit strategy. Should you be looking to buy to let then does your predictions regarding monthly yields stack up. Also, do the sums add up regarding the purchase and then the future development for your project when you come to sell and receive the level of capital appreciation that you require. While the temptation can be always to look at high growth areas and yield predictions one of the best pieces of advice is always to keep in mind areas that you know and to consider the ramifications of running a build project further afield from your location.
What is provisional acceptance
This can be vitally important to the purchasing process as entering an auction house with an auction loan in principle agreed prior to the property going under the hammer can alleviate the stress of looking to secure finance once the property has been won. Attaining a provisional agreement can be reasonably straightforward compared to securing a development loan for instance, while having certain criteria such as your experience level and a proposal for funding which isn’t too ambitious can mean a provisional agreement can be reached in a very short period of time. This isn’t to say that first-time auction purchasers of ambitious developers will be refused it just means that the underwriting process to attain the loan in principle may take slightly longer.
Why is auction finance important for developers
Speed, this is the overriding message that you will see throughout this piece and when you consider a 10% non-refundable deposit is paid on all auctions won the costly repercussions of a failed completion don’t worth contemplating for any winning bidder irrespective of experience or wealth. The ability to also secure funds without the more in-depth underwriting process that can be applied from a development loan is also a significant plus, it is for such reach why a property will be purchased for speed and then re-financed a short period of time later.
What type of properties can auction finance purchase
The most common is residential property, the end purpose for the purchase can have different outcomes for both the terms and lender offers you will receive. One of the big factors here will be is the purchasers looking to live in the property or not. Naturally, the general level of condition, location and current state of disrepair will be required, the lender may also request the auction houses sales documents. If they are looking to live in the property then they will be looking for a regulated loan, but if not then they will require an un-regulated loan. Other long-term objectives for a property that can affect the loan rate and offerings could be has planning been agreed on any required development work, the level of planning which has been agreed, if looking to refinance following purchase how quickly is this intended and is there a policy provider already in place.
A lender will require more information regarding this type of property purchase compared to a standard residential purchase, having said this though the type of property which lenders will help the purchaser secure can include offices, warehouses, restaurants, retail shops, pubs, industrial facilities with funding available from Mint Bridging for all of these type of auction finance requirements, however as we specialise in unregulated loans.
This concerns semi-commercial properties which comprise a mix of commercial and residential i.e. high street retail unit or restaurant which then contains residential property above. As Mint Bridging specialises in unregulated loans we will not provide funding for lenders planning to live in any affixed residential properties attributed to the commercial property.
What do I need to know before bidding at a property auction
– Actually be clear that you are eligible to receive auction finance from a lender
– Be sure that you have done your due diligence on the property you intend to purchase
– Comprehensively review the auction house document relating to your intended property
– If possible speak to the vendor or auction house to see if you can visit the property with an architect or builder to assess it’s condition
– Review the full legal pack from the auction house and also have your own solicitors review it
– Ensure you have a solicitor review all of the legal searches and legal covenants
While it’s true that experienced developers/auction buyers may choose to overlook certain elements from the above checklist the more that you can undertake prior to the auction provides the greater degree of investment security.
Why would I be refused a property auction loan?
The reasons can alter from lender to lender but a number of key areas for failure to secure a property auction loan are for standard reasons. Lenders will be highly influenced by your level of experience; where Mint accepts applications from all experience levels including first-time developers, for a number of loan providers this would be a non-starter.
Property location is also key as underwriters will access the property to review firstly location against current market trends and also the level of works and if this would achieve the expected resale value. This would also be measured against trends within this area as such is the asking price likely to be met or alternatively is there a refinancing model in place at the end of the term.
One of the most important areas is that of the borrowers own capital that they are putting in to fund the purchase, while it’s standard to as for between 70% – 75% the reality is that the greater the purchaser commitment to the facility by the way of their own investment the greater the terms the lender can provide. Naturally, should a first-time developer look to purchase a property at auction and be seeking 80% LTV then this would be a difficult loan to underwrite.
Can I get an auction loan for a property deemed uninhabitable?
The short answer is yes, once of the strengths of working with an alternative lender as opposed to high street lenders is their flexibility. You may have to be prepared to go through a more stringent underwriting process and prove that you either have the funds in place to undertake the works needed to bring it back to a livable/marketable state. Should you be looking to take out a development loan in conjunction with the auction loan then you will again need to outline the plans for the development and provide accurate information and proof relating to the security being used to fund the development. Naturally, your experience level within the property development sector will strengthen the case of taking on such a project. Taking that into account it’s also worth knowing that Mint Bridging is flexible when it comes to the experience level we treat all cases individually, so should you be a first-time developer taking on such a project then we would evaluate the project, the borrower and the security accordingly.
Is auction finance right for me?
This can come down to a number of questions that you will need to ask yourself prior to bidding on a property under the hammer, most importantly do you have the initial 10% to put down as a deposit and the resulting shortfall available to you to fill the void left by your secured auction finance. This obviously is the immediate concern but following this, there are other questions you need to ask yourself such as are you comfortable with securing finance with a deadline in place? If not then securing an agreement in principle is always recommended. Also, should you be an inexperienced developer would you feel comfortable with having to pay higher rates, unfortunately, this can be one of the downsides of auction finance for new users of this funding line. However, the difference isn’t too substantial but you should be prepared to pay slightly more for your first few auction purchases. On the plus side, all lenders of auction finance do have the potential to purchase property below market value without the need to contribute the full asking price.
Do you need a property auction loan?
Contact Mint Bridging today to discuss your auction finance needs on 0161 710 2006 we have underwriters on standby to discuss your case. We can review your needs to explain all your available options from our property auction offerings to discover personalised loans tailored to your needs. We provide some of the most flexible terms and competitive rates on the UK market regardless of experience, project size and required drawdown time frames. Our funding solutions come directly from Mint Bridging we are the lender meaning we can save you more on fees.