A guide to auction finance

The learning objectives for this article are to:

Buying at auction is a fast-growing part of the property market. Digital pack provider Moverly reports an 11.3% growth in the number of auction sales in the 12 months to August this year, equaling £2.9bn in sales.

It is therefore of great importance to understand what is driving this, why it is, and how to most effectively service clients who wish to purchase property in this manner.

Why people buy property at auction

Every bidder will have varying reasons for using an auction to find and buy property, but the most common reasons for doing so are generally because properties put up for auction are often sold below market value and because transactions are quick (more on this later on). Additionally, auctions are a good place to find properties suitable for further investment, as well as being somewhere that unusual or quirky properties are more likely to be found than they are on the normal market.

Meanwhile, auctions are becoming more popular because of the growth in digital auctions, which are easier and more convenient to use than attending a physical location is, and because property bought at auction will have no chain.

Preparing your client for an auction purchase

While property auctions have become more accessible, they still contain complications and risks and so require specialist alongside expert advice. Here we detail what a buyer must understand before attending an auction and what they must have prepared.

• Tight timescales: A successful bid will require a non-refundable 10% deposit on the day (unless the vendor has misled the buyer or in the case of specific legal issues coming to light) and, typically, a 28-day deadline to complete the purchase completely.

• Specialist funding: The timescale detailed above clearly rules out most traditional funding methods. A specialist adviser will need to tailor a solution to the individual client’s needs, which often includes utilising other property assets as additional loan security. This means that a borrower’s personal or business cash contribution to the purchase price is reduced to just the 10% deposit paid on the day of auction and the subsequent valuation and legal fees associated with the purchase.

• Paperwork and other admin: This is a crucial aspect of any auction purpose. Buyers will be expected to have read the legal pack associated with any property they are considering, which should include the proof of title and information about any covenants or planning consents that are attached to the property. As well as this, proof of identity and address, proof of funds, and solicitor details will be expected from the buyer.

• A sound exit strategy: Clients must be clear about the exit strategy they have for any short-term loan they may be using to fund an auction purchase. This would usually be via a refinance onto a longer-term product, the sale of the property, or even a combination of both if additional securities have been offered as part of the loan structure.

• Understanding the property: It’s not uncommon for properties sold at auction to require an element of renovation and refurbishment. In fact, many auction buyers would be looking at exactly these types of properties with an eye for making a profit at a later date.

In this situation, the property will usually require modernisation, such as a new kitchen or bathroom or, in some circumstances, a complete redevelopment of the property. This might include an extension or a total internal restructure if the borrower intends to change a standard residential property to an HMO.

• Being mindful of risks: The very nature of an auction brings about risks normally mitigated in the regular housing market. For starters, the tight time limit leaves little for a thorough inspection of both the physical and legal status of a property. In some cases, a property may turn out to be in such poor condition as to be unmortgageable. There are few avenues available for legal recourse. Second, there is of course no guarantee of winning. Losing out on a bid means a lot of wasted time and energy on the clients’ part. A further risk is of a client not sticking to their budget – auctions, especially in a physical location, can be exciting, and the atmosphere potent. Buyers must be disciplined in sticking to their budget.

Loan type considerations

A bridging loan is the most typical type of loan for a client who needs to borrow money to fund an auction purchase. These sometimes take the form of ‘auction finance loans’, which work as a bridging loan at their core, but have several specific features, depending on the lender in question.

Additionally, the cost of any the cost of any necessary works to the property are just as important as the purchase price itself and must be considered when sourcing lending options. This situation will require a light of heavy refurbishment loan, organised within the restrictive timescales of an auction, which only highly specialist lenders can provide.