Buying a property at Auction?
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What is Auction Finance?
If you have ever seen the TV show “Homes Under the Hammer” then you know many properties are sold at auctions.
However, it is not just properties sold at auction, but also cars, estate sales, furniture, antiques, collectibles, you name it, it can be sold at auction.
Auctions are unique and interesting places to visit, and also to find a bargain!
However, you need to do your homework and research prior to the hammer falling, and also have your financing in order.
If you are making a small purchase via an auction, you may simply pay cash, or use a credit or debit card once the auctioneer states sold!
However, larger purchases, such as properties, require larger loans, and you need the money soon after bidding.
Having the winning bid is a good feeling, but now comes the back end, the behind the curtain part, payment for your winning bid.
If you are looking to buy a property, this can mean tens of thousands of pounds, if not hundreds of thousands of pounds.
Loanable knows loans and financing, and we also understand having the winning bid at a property auction, and knowing you have the money and financing all in place, provides a great peace of mind.
When you buy a property at auction, you usually need to pay a 10% deposit right there and then. The remaining 90% is expected in a short period of time, usually 28 days.
Having your loan approved and ready to go prior to the auction solves two (2) issues:
- You know the maximum you can bid for a property.
- You know you have the financing there waiting, already approved.
If for any reason you were the winning bid, and did not have the money or financing in place when they time was due, you could lose not only your 10% deposit, but also be responsible for fees and interest until the property is re-sold.
There are two ways to secure your auction financing:
- A Bridging Loan
- A Mortgage in Principle
Here at Loanable, we can help you with both!
Looking for a loan today?
Bridging Loan & Mortgage in Principle
A Bridging Loan uses an existing property to secure a short-term loan against the new property, so you can finance the new property. This is a short-term loan, and allows you time to secure complete financing on the new property.
A Mortgage in Principle is you being approved for a set amount for a loan, and the condition for the loan will be on the valuation of the property.
This allows you to bid on a property, and if you are the winning bidder, your loan can be finalised in a very short period of time, once the property has been valued.
Thinking of buying a home under the hammer, then let Loanable get you ready to find that bargain and hear going once….going twice….going three times… sold….to you!
- Know your limits for bids!
- Bid in confidence knowing your financing is secure!
Benefits of Buying a Property at Auction
- You can view a wider range of properties, not just properties offered by estate agents and sellers.
- It is a quick way to buy a property as properties are released to the buyers almost immediately.
- It’s a way to get a bargain, some properties draw little attention and sell cheaply.
FAQs about Auction Finance
What is auction financing?
This is a type of loan that allows the borrower to buy property at auction that matches a set of criteria that has been pre-agreed by the borrower and lender. If the borrower’s application is successful, they receive an “in principle” offer, enabling the borrower to bid for properties at auction. If the borrower successfully bids for one matching the requirements pre-agreed with the lender, funds will quickly be released for the completion of the purchase of the auctioned property.
What do I need to be eligible to apply?
You will need proof of income, proof of address and photographic identification. Other, additional information may potentially be required, depending on the particular lender. For an ultimately successful application, you will probably need to provide a security asset as well – such as property in your name.
How Much Can I Borrow?
This depends on various factors such as your level of income (including rental yields for those with a property portfolio); your track record at auction, and the Loan To Value (LTV) offered by the lender on the auctioned property. The LTV is the amount the lender will provide – usually expressed as a percentage of the valuation of the auctioned property. So, if an auctioned property has a valuation of £200,000 and the LTV is 70%, this means that, subject to other criteria, a loan amount of £140,000 may be offered (70% of £200,000) In terms of broad industry parameters as a whole, however, borrowings typically range from £50,000 – £10M.
If a property has to be valued prior to auction to assist with my loan application, who will meet the cost of the valuation?
This will depend: there are some lenders who will pay for the valuation while there are others who will not.
Can I apply for auction finance if I’m self-employed?
Yes, you can. Historical bank accounts will be looked at by the lender to show sufficient levels of earnings to satisfy the lender that the loan is affordable to you. If you are a full time property investor / landlord, then the lender will ask for accounts showing your rental yield to ascertain what loan amount they consider affordable to you.
What information should I have with me at auction to allow me to make a bid?
To be able to make a successful bid, you should have two forms of identification. One should provide proof of address and one should be a form of photo ID. You should also have details of your solicitor and be able to provide details of your proposed method of payment.
Am I able to bid without identification?
You will not be able to make good on a successful bid without meeting the criteria set out above – which includes having identification.
If I successfully bid on a property at auction, do I need to make a downpayment the same day?
Yes, you will typically need to pay an administration fee and also pay a deposit which is usually 10% of the purchased property’s total cost. In certain instances where the total cost of the purchased property is particularly high, you may be able to pay less than 10% as a deposit.
Do I have to buy a property I successfully bid for at auction?
Yes, this is a legally binding agreement. Therefore, once the auctioneer brings the hammer down you have entered in to a contract. You should never make a bid if you aren’t prepared to accept the consequences of that bid being successful.
Should I buy a property if it’s in a state of disrepair?
Normally, an auction house will release a prospectus of the properties to be auctioned ahead of the auction itself. This means that, if you are interested in a property, you can have structural reports, surveys and other areas of due diligence looked in to ahead of the auction to help you decide if you want to bid – and also to help you establish if you can successfully receive auction finance. Obviously, the cost of reports you have conducted on a property could be to no avail should you be denied auction finance or should you subsequently decide you don’t wish to bid on the property in question.
As someone who is new to auction finance and who only owns one property, can I still apply?
Yes you can, although to reflect your inexperience, you can expect the amount you can borrow to be smaller (and the interest rates higher) than is the case with a more experienced, already successful property developer. In addition, you can expect to need to provide a security asset to guarantee the property auction loan. The most common security asset offered is the available equity in the borrower’s property(ies).
What is “conditional approval’?
This is also known as an “in-principle” agreement and it means the lender will release a pre-agreed amount of money for a property for a borrower to buy at auction – provided the property meets with criteria pre-agreed between the lender and the borrower. For example, the lender may agree to finance 60% of a 2-3 bedroom property that costs no more than £170,000. ( Please Note that there will also be other other criteria to meet that varies between different lenders) If the borrower then buys an appropriate 2 bedroom property at auction for £170,000, then the lender will release £102,000 (60% of £170,000)
How long before the auction itself am I able to see what properties will be for sale?
This depends on the individual auction house. However, brochures of properties to be auctioned are often available up to a month in advance. Getting hold of these brochures early can be very useful as you can then be very clear with property auction lenders when it comes to showing them what you intend to use a prospective loan to buy.
What happens if I end up paying more for a property at auction than I intended?
There are inevitably times when bidders go over budget if there is a competitive bid and bidders can still see a profitable upside in exceeding the amount they had planned to bid beforehand. It’s important, though, for bidders not to seriously overstretch themselves. Successful bidders who have spent more than they previously intended may be able to apply for a bridging loan to cover the over-expenditure. That said, you cannot simply rely on receive funding in this way which makes careful financial auction planning very important.
Is it possible to bid online for a property at auction?
Yes it is. And it is also possible to bid via a telephone intermediary acting at the auction on your behalf. Intending to bid in these ways should not effect a borrower’s eligibility for a loan.
Can I see the relevant legal documents relating to a property before the auction?
Yes, it is customary for these to be readily available at the auction house.
Should I insure a property I buy at auction?
Yes, to protect your investment you should insure the property you have bought at the first opportunity.
How long will I have to pay for a property I buy at auction?
Typically, you will have 28 days to pay for the property in full. This normally means paying the total amount less 10 % deposit which is usually paid on the day of the auction. There are rare instances when you will have a shorter period of time to pay the total outstanding balance on the property. This can be as little as 7 days in some instances.
How much should I pay at auction?
It’s highly advisable to decide the maximum you can afford before the auction. If you enter a bidding war and decide it could still be profitable to go over your original budget, don’t get lured in to territory that can cause you genuine financial difficulty (This could lead to you having to pay an amount far in excess of the amount of auction finance the lender will provide you)
Is my information with Loanable secure?
I have been refused an auction finance loan from one of Loanable’s competitors. Is it still worth applying?
Since we may have lenders on our panel who are competitor may not have, it can still be worth considering making an application through us.
Will I be charged an Exit Fee?
There are some lenders on our panel who will charge an exit fee from the agreement. This is usually expressed as percentage of the total loan amount – and the percentage can vary depending on the overall amount that was borrowed.
Can I extend my auction finance loan period?
Some lenders will allow you to do this while others will not. If this is an option provided by your lender, you may also incur extra costs – often known as renewal fees. This is one of the many reasons why it’s always crucial to carefully consider all the conditions of a loan agreement before entering in to it.