Raising finance to buy property at auction is a never ending nightmare. To be blunt, it’s the reason why most people do NOT buy at auction.
If you successfully bid on the day you give a 10% deposit and exchange contracts. Then 28 days later (sometimes 14 days) you have to come up with the rest of the dosh.
Which is where the lender comes in – as they are providing some of that “rest of dosh” to pay for the property sale completion.
In theory, this should be quite straightforward. In theory.
To be honest 28 days (in my mind) is plenty of time for the valuer to visit the property and report back to the lender if the property is suitable security. The solicitor then needs to do his various checks and bits and bobs (I am not a qualified solicitor so although I don’t really understand their various paper shuffling exercises, I do know it’s EXTREMELY important). And then he in turn also reports to the lender. And then the offer gets sent, gets accepted and funds are released. In this age of instant banking, funds can be sent the same day.
In this day of “the internet” emails, reports and any sort of documentation can be sent instantly.
But for some reason everything takes a l-o-n-g time.
Which is why, if you are looking to buy a property at auction, and you need to raise finance, it is always best to have an application for finance (and preferably an offer) before you bid.
Because the fact is, for some unknown reason, valuers, banks and solicitors seem to do a whole load of unseen-yet-important-paper-shuffling-stuff before you get your monies released.
That means anything which may add to this, needs to be done beforehand so you do not add any more to the “unseen yet incredibly important paper shuffling” because otherwise you will most likely blow your chances of completing on time.
If you are thinking of buying property at auction and want to raise finance for the purchase – my advice: speak to a broker beforehand. Submit a provisional application and get indicative terms of business and willingness to lend. Where possible, it’s best practice (although will cost you more) submit a full application and get the property valued before auction and a mortgage offer in hand.
That way when you bid, you know you have the money to buy and the best chance of auction success!
Thanks for inviting me to pop along and post regarding finance for auction purchases.
I completely agree with you that arranging finance in the traditional sense i.e. a mortgage is not for the feint hearted where auctions are concerned. I really would not want to risk paying for valuation and booking fees and guaranteeing the mortgage would complete on time. It’s usually possible, subject to the lender, to get an offer in this time but as many lenders want full searches and any conditions will be in the offer the subsequent legal procedures will mean it’s highly likely you’ll miss the typical 28 day deadline. Unfortunately as it’s not possible to do an instant remortgage after purchase with most lenders any longer you can’t use the offer once it’s made and would have to apply again in 6 months.
I also strongly advise against using mortgages if your plan is to flip ie sell the property quickly or if it needs major work as buy to let lenders expect the property to be lettable and also don’t like being used as cheap bridging and may not lend to you again.
Really the only way to tackle auction purchases is with cash and/or bridging and there are a number of ways to do this and its not as scary or expensive as it sounds.
If you have a lot of equity in a property or it’s unencumbered (no mortgage or loan on it at all) then some bridging lenders will give you a ‘line of credit’ in advance. Essentially all they are doing is valuing the property and agreeing in advance a loan based on its value; most of the paperwork and legals will have been done so when your ready to buy the auction property it isn’t much work to get the cash advanced you need secured against your other property. This leaves you free to remortgage the property you have bought at your leisure after purchase or indeed sell if that is the plan.
You can of course raise a bridging loan on your new purchase instead; typically deposits required against a bridge are 25-35% depending upon the lender, rates and terms.
A lot of people think bridging is expensive and its true its typically 2-4 times the cost of a mortgage but the aim is to only hold it for as long as you need to and if the deal is worth it then the bridging costs will be too.
I did a half a million pound bridge for an investor last year that they refinanced only a few months later, we had to do the bridge due to the 28 day deadline and any other financing would have taken too long due to the property type. The total cost of the bridge plus refinancing was £50k but they added £250k equity to their portfolio – is that worth it? It’s all relative.
Typical costs for bridging are 0.65% to 2% a month and this will every much depend upon other costs and fees, the lender, speed and predominantly the amount of security being offered – the more security you can offer the lower the rate you can achieve.
For example if you use an unencumbered property you already own plus the new purchase as security not only will you reduce the rate you pay but you can also borrow more than the purchase; this could give you all of your purchase price, costs and funds required to do any work – legitimately doing No Money Down! If you then sell or refinance the new purchase and pay off the loan you can repeat this over and over again never needing any more of your own money.
I have written an article about this strategy and any reader can email me for a copy.
Finally it’s important to use a reputable bridging lenders as unfortunately the industry has a number of rogue players and its common practice to promise what appear ‘too good to be true’ rates and terms in return for commitment fees etc and never see the loan materialize. Better still use a broker who understands property investing and bridging finance and knows which lenders to use for what circumstances. It is by no means a situation whereby the cheapest is the best as speed, fees and other requirements such as income etc all play a key part.
I hope this proves a useful overview to finding your next auction purchase!
Best wishes, Lisa
Thanks for the insight Lisa, it is good to learn so much more about bridging and the different funding options around it.
RE: searches and legals. To be honest, with auction property much of the legal info is available prior to purchase and should satisfy most lenders with the info available.
I would caution any buyer against purchasing a property that has not been thoroughly checked by a solicitor and so I believe in most cases when this has been done, it should be suitable for mortgage finance. I have successfully used mortgages to buy many auction properties.
Very much depends upon the lender though Sam as they may be out of date and some lenders are insisting upon using solicitors only from their panel and they must perform the searches; especially so if using any of the commercial and semi-commercial lenders these days.
Kind regards, Lisa
Legals as SO crucial though; recently contacted by a chap looking for finance who had purchased a property at auction with a sitting tenant in it – he hadn’t read the legal pack!!
Yes Lisa – the legals are everything. People do not seem to realise the legal issues with a property can be far worse (and more expensive) than any refurb required – plus adverse legals can affect the ability to raise finance.
Can your client with the sitting tenant raise finance for his purchase?
Last time I spoke to him he hadn’t Sam; could get bridging but no way to get off it. We could get a loan but he didn’t have the cash difference needed as he expected to raise 75%!
A loan for a sitting tenant? what sort of loan? what sort of tenant? (i.e. protected/ regulated etc)
Regulated. Rent only £425 pcm and £210k purchase! Can get a loan but not enough for what he needs and has no more cash!
What sort of LTV? How are the sums worked – do they use rental and gear from that? Does it make a difference if tenancy is successionary (e.g can be inherited). What about “life tenancies” have you come across lenders for these?
Purely commercial lender territory and yes lending based on yield; could borrow about 50k. Regulated/life/protected – all much of a muchness very restricted lending options and based on strict yield calcs.
Hi Sam, gorgeous houses. Just saw this – Thatched 5 Bed Cottage with swimming pool – holiday home potential? http://bit.ly/WyVnMD
That’s an interesting idea Ann-Marie. I don’t know that market well enough to know if it would work
Me neither! Was just musing. One of my long term goals is to open adapted homes/holiday homes. As a mum of a special needs/Autistic son we know the nightmare of finding good holiday places to go to, not many specialist providers. Just musing. Can’t finance (yet)
I love musing – and that sounds like a very interesting idea and a good long term goal. Talk with Lisa (above) about finance, maybe?
Hello ladies 🙂
Not so sure about the holiday home idea…location wise. I’m not an expert on holiday lets but apart from Thetford Forest you’re too far from any holiday activities like the broads or the beaches. Norfolk has far more to offer. As does Suffolk as you’re not that far from either but far enough if you’re visiting for a holiday. Also looks pretty close to Mildenhall and Lakenheath airforce bases. You can only believe the noise when you’re there when they take off or come into land! If you’re serious have a word with Norfolk Holiday Homes who should be able to give some quick advise as to where the holiday demand is and whether it’s there.
Hi Ruth and Sam
Thanks for the feedback! Noise would not be a great asset for what I had in mind, but as I wrote earlier, simply musing just now.
There Is NO Such Thing As An Easy Buy To Let: It’s Now A SuperScrimpers Challenge!
[…] as I plan to own this property for quite some time, I decided that I would purchase the property with a buy to let mortgage. Now, I know a lot of people think you can’t buy a […]