A Quick Guide for Landlords – Understanding Auction Finance
Purchasing residential buy to let properties at auction have proved a popular source for many landlords and investors. This can seem daunting for first-timers, however with the right mindset and financing in place there should be no reason why you cannot met these deadlines for completion.
Auction Financing – On the Day
Each property will have a guide price. This is the auctioneer’s estimate of what the property might sell for. It is ultimately the buyer’s responsibility to decide how much they want to bid. Each property will also be subject to a reserve price. If no bid equals or exceeds the reserve price then the property will be withdrawn from the auction.
Each property will have a legal pack which will be available to the public before the day of auction. This is a set of documentation which has been prepared by the seller’s solicitor. This will generally contain: the sales contract, copy of the title deeds, land registry searches, special conditions of sale, and leases and tenancy agreements (if applicable). It is important to send over the legal pack to your solicitor beforehand so they can thoroughly review it and ensure that there are no hidden problems which could risk not completing on the purchase.
On the day of auction, you will be expected to put down a 10% deposit to secure the property. If your bid is successful, you will then usually have a further 28 days to pay the remaining 90% balance, however you will need to check the conditions of sale as this can sometimes be shorter.
It is important that you secure an agreement in principle before you start bidding on a property because as soon as you are successful on a bid you will have exchanged contracts and entered into a legally binding contract. If you then do not complete, you will risk losing your 10% deposit.
Why Purchase Buy To Let Property at Auction?
Properties are sold at auction for numerous reasons with the main being:
- Properties which are struggling to sell on the open market
- Vendors looking for a quick sale
- Repossessed properties
- Properties which requires renovation/development
How Does Auction Finance Work?
Auction finance is provided by bridging lenders who can complete within the time frames of the auction. We often get asked by clients if we can place them on a long term buy to let mortgage from the start, however there are certain risks associated with this. The main reason why properties are sold at auction is usually because the property is not in a lettable condition. The valuer will value the property and give a rental figure based on its current state. If the property is in a livable but not lettable condition, then the rental figure will be reduced which will then affect the affordability calculation. This could mean that the lender may not be able to lend up to the full 75% loan to value. There is also a risk that the mortgage will not complete within the 28 day time frame and if you are looking to carry out works to the property, then this would be a breach of the mortgage conditions under a standard buy to let mortgage.
You would repay the loan by either selling the property or holding it as an investment and moving it to a long term buy to let mortgage. This is known as the ‘exit strategy’ which the bridging lender will need to be aware of at the point of application.
We have lenders who can lend up to 75% LTV (or 100% with additional security) of the agreed purchase price. Bridging finance usually involves retaining the interest costs which get deducted from the loan on day one. This results in reduced proceeds on completion. The benefit of this however, is that there are no monthly payments during the term of the loan as these have already been deducted. The lender will need to see evidence of the deposit, legal costs, stamp duty and if you are planning to carry out works to the property then they will also need to see evidence of the cost of works. It is important that you have the cash available to cover these costs.
- Rates from 0.55% per month
- Up to 75% LTV (up to 100% with additional security)
- Loans from £50K to £15m
- Terms to 24 months
- Heavy refurbishment options available
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It is more important than ever to seek the advice of an adviser who specialises in this market.
We provide a FREE assessment on all our services. Please contact me directly for more information or use the Get in Touch With us Today feature at the bottom of this page.
Megan Parkin – Property Finance Adviser