Everything you need to know about auction finance from the ground up, helping you understand bridging finance.
Buying property at auction is a very attractive prospect for many developers and landlords, as it allows them to snap up real estate at a knock-down price. However, there is a strict requirement at most auction houses to complete full payment for the property within a 30-day period, which is much too fast for a regular mortgage to be arranged. Instead, buyers must seek an alternative form of finance in a bridging loan, which can provide the necessary funds in a short amount of time.
Auction finance is one of the most popular uses for bridging loans, but the terms and conditions associated with it need to be perfectly understood before proceeding. In this article we’ll discuss how auction finance works and why it’s often the right choice for auction purchases; anyone considering a bridging loan for their auction purchase should consult their broker before applying for a loan of this type.
As mentioned above, purchases of auction properties usually need to be completed within a short space of time. In addition to this, successful bidders must put down a sizeable deposit (usually of 10%) which is non-refundable. This makes it absolutely crucial that the necessary funds can be found in time, and requires a source of finance that’s both fast and reliable.
A mortgage is not an appropriate solution for an auction purchase. As any homeowner knows a mortgage can take many weeks to complete, and leaves little hope for completion within the 30-day timeframe of an auction purchase. In addition to this, many of the homes sold at auction are unmortgageable anyway - they may be uninhabitable, or have a short lease, or require a specialised mortgage lender (high-value listed properties or specialised conversions, for instance). In these cases a mortgage is simply not viable, and alternatives must be sought.
The other option, of course, would be to pay for the purchase in cash. However, although these properties are often listed at bargain prices, they still cost more than the average developer or landlord is likely to have laying around; most properties will go for at least six figures, and that kind of money just isn’t available to most developers. Therefore, bridging finance fills a gap; it’s faster and more flexible than a mortgage, which allows it to be used to quickly secure property, and can be used to secure opportunities that the borrower’s cash flow cannot accommodate.
The 30-day limit for completing an auction purchase is far too fast for a mortgage lender to work with, but a bridging lender is entirely capable of meeting these tight deadlines. This makes securing a bridging loan for auction purchase much less strained, and enables the borrower to conduct their purchase as they normally would. When making a purchase at auction, buyers will need to do substantial groundwork ahead of time, and usually pay a visit (or have one of their employees visit on their behalf) to the property in question. This allows them to establish the value of the property and whether it matches its description in the auction house’s listings.
Bidders will go into an auction with a price in mind, and will do their best to stick within that range. However, the flexibility of a bridging loan allows bidders to react to changing circumstances, because there’s no strict requirement for a bidder to stick to their initial plan. With a mortgage, borrowers often find themselves disqualified for finance if they end up paying more than they initially applied for, which makes it impossible for them to negotiate. A bridging lender, however, needn’t be contacted until after the bid has been made, which means that as long as the borrower hasn’t overpaid for their property they should be able to secure finance quickly.
The speed at which bridging lenders work is the key to making auction finance viable. While banks measure the time from mortgage application to approval in weeks, a typical bridging provider will take only a few days to go from initial proposal to a firm offer, with funds available for drawdown shortly afterwards. This enables borrowers to seek finance after they’ve made a bid, rather than being constrained by a deal agreed in advance.
This speed of action is best exemplified by examining bridging lenders who “rescue” properties for their clients. In some cases, a bridging provider has proved unable to come through with their agreed funds in the specified time, and has left their client in the lurch. With only a few days left until the property must be paid for, the purchaser is in a tricky situation. However, bridging lenders will work round the clock to arrange a solution, and a quick glance through the case studies of some of the most prolific lenders in this sector turns up stories of deals saved at the last minute, or turned around in just 48 hours.
This highlights the immense speed and flexibility that characterises bridging lenders, and the vital niche they fulfil. Without access to high-speed financial solutions, it would be nearly impossible for bidders at auction to make a confident offer, hampering their ability to act on opportunities as they are presented.
As with all bridging loans, auction finance is a form of secured loan. Most often, these loans will be secured as a first charge against the property being purchased at auction, which means the lender will need to conduct an independent valuation of the property. Since the loan is secured against the property itself, this means that the lender will be entitled to repossess and sell it if the borrower should fail to repay the loan (and interest) in full. This makes it imperative that anyone considering a loan of this type fully understands the implications of this form of finance, and that bridging finance is the correct solution in their situation.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
Generally loans range from 1-24 months in duration although they can, in exceptional cases be both shorter and longer. It is wise to go for a period slightly longer than you think you need to redeem the loan given that reputable lenders will refund any unused interest if you settle them early. Bridging.com can help you to find these lenders.
Bridging loans are usually repaid from either the sale of the security property or other assets or from the re-financing of the property onto a longer-term mortgage.
Most lenders will accept security on residential, commercial, and mixed residential and commercial properties. Some will accept security on land with planning permission and some even on purely land or other assets.