There are advantages to buying property at auctions. It is possible to find property at below market prices, and buyers do not have any long house-buying chains to worry about. As soon as the hammer falls on a winning bid, the buyer is committed to complete the purchase of the property within 28 days, and this is where bridging finance is useful.
The added extra fees
If a buyer does not have the cash to purchase the property, they will need a loan, usually in the form of a mortgage. A mortgage can often take longer than 28 days to arrange, so a bridging loan is ideal to complete the property purchase, and can be repaid after more long-term funding is secured – possibly earlier than you originally planned.
There will also be a number of charges and fees that the bridging loan may not cover. After a winning bid, 10% of the purchase price of the property is paid to secure the winning bid. The auction house will charge administration fees of between £200 and £300. Stamp duty will probably be charged on the purchase and there will be solicitor or conveyancer fees to pay. As soon as you sign the contract for the house, insuring the property is the responsibility of the buyer.
The press often reports on homes that are sold at auction for very low prices. These seem like a bargain, but property this cheap will often be derelict or semi-derelict and classed as unfit to live in. Most lenders will not provide a mortgage until the necessary building work has been done. This could be as simple as installing a new bathroom or kitchen, or could involve major construction work. It is possible to use a bridging loan to provide the funds to refurbish the property. After completion, a standard mortgage should be available. The refurbishment work will probably increase the value of the property.
Some investors buy cheap properties at auctions, refurbish them with a bridging loan, then sell the property on to make a profit. Unlike a standard mortgage, a bridging loan does not require the borrower to use the property as their main residence.
There is a high demand for houses of multiple occupancy (HMO) where landlords rent a number of bedroom spaces to multiple tenants who share the bathroom, kitchen and communal areas. Landlords often buy large run-down houses cheaply at auctions using a bridging loan. They use bridging finance to convert the building to an HMO.
Before attending a property auction, thoroughly research the subject. Make sure that you have finance options available, and arrange to visit any property that you want to bid on. Look at the value of other property in the area to assess whether the guide price is fair.
At the auction, be wary of fierce bidding, as homes can sell for more than they are worth
Talk to Ascot Mortgages for advice on the terms and conditions of bridging finance that can help finance auction property purchases.