If you've ever bought property at auction or wondered about how property auction finance works, then this is the blog for you.
Auction property finance is a little different to a conventional residential mortgage. It can be confusing…but it doesn't have to be.
Auction finance, also known as bridging finance, is a special kind of loan that helps people buy properties at auctions. It's a short-term loan that is tied to the property you want to buy.
It is commonly used by property investors and developers to assist in funding the purchase of a property at an auction.
Instead of waiting a long time to get a regular mortgage, auction finance lets buyers get the money quickly so they can buy the property right away. Then, they can pay back the loan later with a regular mortgage. Or, if they fix up the property quickly and sell it, they can use the money they get from the sale to repay the loan.
The thing is, auction finance is not as widely recognized as a traditional mortgage, and even auction houses and experienced property buyers may not fully understand its workings.
Do you have any questions about auction property finance? If so, we have answers. Lots of them.
We've created a guide to property auction finance using a list of commonly asked questions to help remove some of the mystery from the process.
How does buying a property at auction work?
Purchasing a property at auction involves competing with other interested buyers to purchase a property being sold by the owner or lender due to the property condition or in a need of a quick sale.
The property is usually sold at auction by a professional auction company or an estate agent to the highest bidder. Before the auction, potential buyers can typically inspect the property for any potential issues or repairs that may be needed. We would also recommend getting the legal pack checked over by a lawyer.
Once the auction has ended and the winning bid has been accepted, the buyer is required to pay a deposit and the balance of the purchase price within a short period of time, usually within 28 days.
How much deposit do you need for an auction property?
The deposit required for an auction property varies depending on the auction's terms and the specific property. A buyer must typically pay a deposit at the time of the auction, which is typically a percentage of the purchase price.
The standard deposit for auction property is 10% of the purchase price. However, this varies; some auction houses may require a higher deposit, up to 20% of the purchase price. It's important to note that the deposit is usually non-refundable if the buyer does not complete the purchase.
It is critical to confirm the deposit requirements with the auction house or estate agent prior to the auction. It's also critical to understand the auction's terms and conditions, as they may include additional fees like administrative or transfer fees.
How soon after an auction do you pay the deposit?
If you buy a property at auction you will need to make sure you typically have a 10% deposit (of the final purchase price) ready on the day of auction, when contracts are signed. Traditional auctions then have a standard deadline of 28 days to complete. You'll have to pay the rest of the funds by this date, so make sure you have your funds in place before you bid!
Is an auction legally binding?
When the hammer falls in an auction room, it represents the exchange of a legally binding contract between the seller and the buyer. It is too late for either party to change their minds, and the sale must go ahead following the contractual terms and at the price agreed upon when the hammer fell. If you are unsure about buying the property at any time, you should not bid. We repeat: DO NOT BID!
Is it cheaper to buy property at auction?
Property auctions are a great way to grab a bargain below market value. That’s because many people who sell at auction are doing so because they want to sell quickly.
Buying property at auction is also a perfect way to grow your portfolio quickly and cheaply - just make sure you do your research first!
What happens if you buy a property at auction, but can’t pay?
There will be legal repercussions and financial penalties if you win a property at auction but can't pay. Besides losing your 10% deposit, you may have to pay additional costs as well. The reason for this is that auction sales are final after the hammer drops.
But don’t worry, a bridging loan is a speedy form of finance you can use to purchase the property and complete the renovation.
How long does an auction property take to complete?
The time it takes for an auction property to complete can vary depending on the auction house. Once the auction has taken place and the property is sold, the standard time frame for completion is typically 28 days - be sure to check the terms/legal pack before the hammer drops.
The type of auction, the type of property, and the condition of the property can all influence the completion time frame. Buyers must ensure that they have secured financing and have completed all necessary inspections and due diligence. It's also a good idea to talk to a lawyer and an estate agent about the auction process and the timeline for completion.
Can home buyers use auction property finance?
Yes, home buyers can use auction property finance.
People often choose auction finance because they're running out of time. For instance, if a buyer is worried about losing their deposit because getting a regular mortgage is taking too long, they can ask for help from an expert in auction finance, like Propp.
How can auction property finance be arranged so quickly?
Auction property finance can be arranged quickly because they have a special way of doing things. Here's why it's fast:
Getting ready: Before the auction, people can get pre-approval for the money they need. This means they're prepared and don't have to waste time on auction day.
Simple application: Applying for auction property finance is easier than regular loans. They focus more on the property's value rather than complicated paperwork. This makes it faster.
Quick checks: The lenders can quickly check how much the property is worth and decide how much money to give based on that. They don't need to spend too much time inspecting the property.
Fast communication: The lenders understand that auctions happen quickly. They work closely with the buyers and their helpers to make decisions and communicate quickly. This helps things move fast.
Short-term solution: Auction property finance is meant to be a short-term thing. Lenders know they'll get their money back soon, so they can process the loan quickly.
Experts to help: Buyers can work with experts who know all about auction property finance. These experts know what to do and can make things happen quickly.
Remember, the speed of getting auction property finance can still change depending on different things, but these reasons help it be arranged quickly.
How can property investors and developers use auction finance?
Property auctions present an exciting opportunity for property investors and developers to expand their portfolios and maximize returns.
Auction property finance is a useful way for property investors and developers to get money quickly and easily so they can buy properties at auctions, fix them up, sell them, and make more money for future investments.
Auctions are the perfect place to find the doer uppers, but investors and developers might have trouble getting a regular mortgage right away if the house is not suitable to live in.
Also, auctions happen fast, and investors need to make quick decisions. They might not have enough time to go to a bank and get a regular loan.
That's where auction finance comes in.
The speed and the processes put in place for auction finance helps property investors take advantage of opportunities and make fast decisions in the property market.
Pros of auction property finance
We've established that speed is a major advantage of auction property finance, but let's not forget about the other benefits:
Transparency: You can see all the bids and avoid any sneaky gazumping tactics.
Fairness: Everyone has an equal opportunity to make their bids, with no underhanded deals going on behind closed doors.
Investor-friendly: Auctions are a great way for investors to find promising properties and lucrative opportunities.
More choice: There's a wider range of properties available, including hidden gems like undervalued homes with planning permission and exciting renovation projects.
Reliability: Once the hammer drops, the deal is done, and the property is yours in just 28 days on average!
So, in a nutshell, auction property finance may appear riskier than traditional property finance, but it doesn’t have to be. If you intend to use auction finance, make sure you understand the risks involved.
Finally, as long as you plan your finances and conduct all necessary due diligence before bidding, auctions can be an excellent way to grow your portfolio - just don't get carried away.
Make sure you come back to this guide to property auctions whenever you need a dependable source of information on property auctions and auction property finance.
Propp.io lets you compare auction property finance, bridging loans, commercial mortgages and development finance.
We help lift the lid on the cost of borrowing in these sectors to give clients insight into those costs before they embark on the next project.
Click here to start comparing auction property finance. We save our clients on average over £8.5k on their deal when they use our optimiser.
Chloe Rule
