Auction Bridging Loans
Properties bought at auction are required to pay a 10% deposit on the day and sign a legally binding contract to pay the remaining 90% within a 28day period. This is when bridging loan for auction comes in. Bridging loans are a preferred option as they help to bridge a gap until a long-term mortgage or sale can be secured. Bridging finance for auction is available for land, commercial and semi commercial buildings, residential and buy to let properties.
Key Features of Auction bridging loans:
- The auction finance can be pre-agreed i.e. you can have an agreement in principle from a bridging lender and when the bid is won at auction you would quickly move it to the next stage.
- A bridging loan is not always based on income or credit i.e. unlike a mortgage the lender will not require to see employment history or business plans depending on the exit route, which makes them that bit quicker. This will be dependant on the loan exit.
- The specialist lenders for bridging will consider certain properties bought at auction that high street lenders may not consider such as certain non-standard construction types. They will also consider properties that need refurbishing or ones that may not have fully functioning bathrooms or kitchen. This will allow you to purchase a property via a bridging load carry out the work and either refinance or sell the property.
- The bridging loan lender will also consider properties that will require heavy refurbishment or conversion for example one could purchase a commercial building at auction and convert it into flats and exit the property auction finance after either selling or refinancing.
- They are available between 12-18 months.
- You can usually borrow up to 70-75% Loan to value of the property (i.e. size of the loan compared to the value of the property). Please note that if you were to use another property as collateral which has equity you may be able to borrow more or achieve lower rates or both.
Things to Ensure Prior to bidding for a property at auction:
- That finance is available to you.
- Make sure there are no unprecedented issues on the property you wish to purchase.
- Review the auction catalogue for any conditions set out.
- Properties purchased at auction usually need work doing to them so it is advisable to view the property with a builder, architect, surveyor to gauge the work and costs involved.
- Check to see if the project will be viable/profitable.
- Obtain a legal pack from the auctioneers which will contain title deeds, local authority search and property information.
- Carry out any legal searched to see if there are any restrictive covenants, this may involve carrying further searches and if you don’t buy or win the property, the cost of which may be redundant.
Purchasing auction property using bridging finance
Most purchasers would not have the amount of cash available to buy a property outright, particularly in certain parts of the country where property prices have rocketed, so this brings Bridging Finance into the forefront. Bridging Finance can either be arranged “in principle” prior to the auction or at or after the auction and completed shortly after the successful bid. This would be well within the time frame required by the auction company and normally much quicker than mortgage finance which due to the requirements to check credit and affordability etc virtually always takes longer to arrange.
Another added benefit of using bridging finance is that it can be used when a property is deemed to be not suitable for a mortgage. This is normally when a property is without a kitchen, bathroom or both or has another defect where a bridging loan company will accept but a mortgage company will not. Bridging Finance can be arranged on a new build property which has yet to be finished or on a renovation type project which for whatever reason has not come to fruition. Neither of these examples are generally allowable for mortgage finance but because bridging is simply based on the value of the security asset, provided the valuation is acceptable, then the bridging loan lender will usually lend up to their maximum LTV (Loan to Valuation) i.e. size of the loan compared with the value of the security and will do this quickly and without the fuss of a mortgage.
Other security such as land or commercial units are also often bought and sold at auction. These purchases are much easier and quickly financed by using a bridging loan rather than by any other finance type. Remember, property is often sold at auction for a reason. This can be requirement of speed or more often because the property has some type of defect.
The bridging finance arranged at auction is a short term solution and once the requirement for the bridging finance is resolved, then the bridging loan is either repaid by selling the property, refinancing the property to say a mortgage or paying off the bridging loan with available cash.
You attend an auction with the premise of buying a property in your local area that you know because of its locality and condition, if purchased at the right price the property can be renovated and turned around creating a good profit. You are triumphant with your bid and have your 10% deposit which you pay to the auctioneer along with providing your solicitors details and signing a legally binding contract which ties you into paying the balance within the next 28 days. You contact the bridging loan company who value the asset and agree to advance the balance of the money which is done so within the agreed time frame.
It is advisable to get the property valued and the finance agreed before attending the auction. In this way even if you are unsuccessful with your bid, the only loss would be the cost of the valuation fee. If you are unable to obtain finance after the payment of the 10% deposit then you could potentially lose all of this money.
In the rare exception when the auction purchase is not suitable for bridging finance, alternative owned properties or properties owned by a willing person could be used to secure the purchase.
Should the 10% deposit not be available, this can be secured on another property if required.
Exit again is the key to whether or not bridging finance is available. The exit is usually either sale or refinance and the lender has to be confident that either one is fully suitable.
Bridging finance is not right for all situations but we always make sure that any loan we arrange is right for you and your needs.