Buying Property at Auction and Financing The Sale
- 7th December 2018
- Posted by: Loanable
- Category: Resources
Going once….going twice….for the third and final time….sold! (and the gavel goes down)
If it was you that made the highest and final bid of (insert amount here) and bought a property at auction, you need to have your finances and loan for the sale in order and ready to go.
Why you ask?
When you purchase a property at auction, you are expected to pay a deposit of 10% of the sale price right there and then at the auction, and then you have 28 days, to settle the remaining balance.
In the world of mortgages, 28 days may seem like enough time to get the loan sorted, however, there can be instances where it may take longer, and even if the loan is in place, the mortgage company is going to call for a valuation to be done, and possibly an inspection of the property.
Some properties purchased at auction may be as we say, “slightly distressed”, or in need of some work. They may not pass a stock inspection, or the whole affair may take longer than 28 days.
This may cause you to ask yourself the following question:
Why Buy Property at Auction?
One big reason to buy a property at an auction is to find a bargain, find a deal on a property. And if you have a habit of watching, “Homes Under the Hammer”, you know there are bargains out there to be found.
Then there are those buyers that like a bit of a challenge. They like buying and fixing up properties that have character and charm, but require a little TLC (tender loving care), and some fixing up to make them what they could be.
Auctions are great for investors, those with property portfolios, or looking to build a property portfolio, and buying properties either to let out, or to “flip”; buy them and then turn around and sell them quickly for a profit.
Then there are those buyers that are tired of getting “gazumped”. They place an offer/bid to buy a property, only to find out later the sellers received a higher offer, and sold the property to the better offer.
As a buyer, your time has been somewhat wasted.
At an auction, there is no wasting of time, or money. You now immediately if you are the highest bidder, and if the property is yours. Any gazumping, is done prior to the gavel going down.
However, having that winning bid also means having your financing lined up, and in order.
So how do you do this?
When you are considering purchasing a property at auction, be it your first gavel venture, or you are experienced at such things, there are a few ways to have your financing ready to close the deal and purchase of the property:
* Cash: you have the cash to pay for the property
* Mortgage in principle: you have been pre-approved for a set-amount or loan amount to buy a property
* Bridging loan: this is a short-term loan using a property or properties, that you already have, to get the money to be able to purchase the new property
There are upsides and downsides to each of these options.
Not everyone is going to have the cash to simply pay for a property. So cash is not the best option for many auction buyers.
A mortgage in principle is a great options, and while it may be contingent on a valuation of the property, it is a good way to know exactly how much you have to work with, how much is the maximum you can spend at the auction.
Bridging loans are good for investors who have other properties with equity and value. However, there is usually a maximum LTV or loan-to-value a borrower can receive as a loan amount, and the borrower needs an exit strategy. Meaning, they need a plan to pay off the bridge loan as they are a short-term loan.
In some instances once the new property is ready for sale or to let, the borrower/investor can get a mortgage on the property to pay off the bridge loan, or the proceeds from the sale of the property will pay off the bridge loan.
So buying a property at auction can be a good deal, and also a bit exciting, but there are some things to keep in mind:
* Get your financing sorted first, that way you know how much you can spend.
* Do your homework, research properties, and auction houses.
* You can work off the guide price, but remember, it is only a guide, properties can be sold for much less, and for much more than the guide price.
* Commission a survey if you are dead set on a particular property.
* View the properties you are interested in if they are local to you.
* Remember your budget, and don’t get caught up in the heat of the bidding moment.
* Remember, there may be some additional costs associated with the purchase and plan for these.