Have you ever tried to buy a property at auction? If so, you will know that you need to have your finance in place, as the payment must be made very promptly.
So what is meant by “very promptly”? Well, if you are the winning bidder when the hammer goes down, you have to pay 10 per cent of the agreed price there and then. You then have to pay the balance within 28 days – if you don’t, you forfeit your 10 per cent AND you could face legal action.
Do be clear about one thing – it’s NOT true that you can’t get a mortgage on an auction property. However, it can be difficult to arrange a mortgage within 28 days. What’s more, most lenders will expect you to have had a survey and valuation done before they will even consider your application. This puts you in a dilemma as you can’t be certain you will win the auction, so if you have a survey done beforehand, you could have wasted your money.
So what is the best way to proceed if you need auction property finance?
If you are interested in a specific property that is to be sold at auction, find out as much as possible about it beforehand. View the property at least once, preferably twice or more. Some auction properties are not viewable in advance – you would be well advised to avoid these.
Find a lender who would be willing to consider the property. Use a finance broker if you don’t know of a suitable lender. Some lenders will in fact be prepared to agree a loan in principle and carry out the survey and valuation afterwards if you are successful. If you can’t find such a lender, you should have the survey done in advance. Yes, it’s a risk, but it’s a risk you have to take.
When you have had your survey done, approach your lender with the survey report. The lender will base their offer on the value as given in the valuation report. Obviously, the lender has no way of knowing what price the property will actually go for at auction. This means that if you are lucky and snap up the property at a bargain price, you will get 100% or more if you decide to take the full amount.
Remember that if the bidding goes over the amount offered, you can’t expect the lender to top up their offer. The lender isn’t concerned with how much you pay at the auction – only with the assessed value of the property. So it is very important that you identify your ceiling and stick to it. If you get carried away and keep bidding till you win the bidding at a much higher price, you will have to find the extra money from somewhere or you will be in trouble.
If you are worried that the lender won’t have the money ready for you in time, talk to your broker before you approach a lender. A broker will often be able to advise you as to which lenders are the best to approach for your auction property finance. The broker may also be able to put pressure on the lender to ensure you get your funds in time.
If it still takes the lender more than 28 days to get the actual funds paid into your account, you will need to arrange a bridging loan. Bridging loans are very often used for auction purchases so it’s nothing to be alarmed about. If the money is definitely on its way, you can get a closed bridging loan for a short period and it won’t cost you too much. Consult your broker about how to go about this.
Buying a property at auction can be an exciting and very satisfying experience. However, if you don’t pay enough attention to obtaining your auction property finance, it could turn into a nightmare. Talk to your broker for the best advice. Brokers can’t guarantee that you will win the auction! But paying attention to these points can make the process as stress-free as possible
Please note that the FSA do not regulate commercial loans or commercial mortgages