January 23, 2017

Bridging finance: What you need to know about financing a purchase at auction

Unless you are a cash buyer it is often a good idea to have finance arrangements agreed and a ‘decision in principle’ before you bid for a property. Whether you secure finance before or after the gavel falls, ensuring your necessary finance is in place to fund the purchase within the completion date timeline is key. So when it comes to buying property in such a time-sensitive environment, it’s crucial buyers know what lenders will look for.

Here’s a guide to the essentials:

Traditional vs specialist finance

Whilst high street banks often can’t lend in time, many specialist lenders out there can and will lend fast to meet the strict time requirements of an auction purchase. The reality is that time constraints preclude the use of high street lenders unless buyers have an existing line of credit. At LendInvest we’ve gone the extra mile, pre-qualifying lots on the Lot11 auction site, to make life easier for property entrepreneurs and the intermediaries that support them. (Look out for LendInvest’s branding on the site, which signposts the pre-qualified properties)

We also assign a fast-track team to all auction finance enquiries, we’ll pay half the valuation fee, and offer 90% of the purchase price or 75% of the open market value (whichever is lower), with rates as low as 0.64% per month

What a lender looks for: residential vs commercial

The first question any lender will ask is: what is the proposed use of the property? Is it a commercial property or residential? It’s a much more straightforward decision for lenders if the property is going to be residential, simply because there is such a clear demand for it due to the housing shortage.

Lending against a commercial property when it is untenanted is rather less straightforward. What business would want to rent that space? What would they be willing to pay? How much work would need to be done to make it suitable for that business? The whole process becomes more speculative and, as a result, less attractive. That’s not to say that lenders won’t do it, more that the finance may be more expensive.

The condition and location of the property

The condition is also a significant issue for lenders to assess. Auction properties often require substantial work. Lenders will generally be more comfortable lending against properties where only simple work is required. After all, if the property only requires minor work, the capital sources will tend to be more readily available.

Lenders will also look carefully at the location. It’s important to establish how ‘liquid’ an area is. That means comparing the housing stock in the area to the number of property transactions. If there is a large turnover, that’s a pretty good indication that the area is a desirable one – good news for lenders, as that means it will be relatively straightforward to sell the property on should the borrower get into trouble.

The role of intermediaries in helping to secure finance in advance of the auction

Intermediaries play a vital role for many auction buyers. Sometimes the buyer will take steps to arrange finance well in advance of the auction. To do this, it is sensible to ask a broker to undertake a price discovery process to obtain the best auction finance deal available. Essentially the buyer will call up their broker to explain that they are planning to bid on the property, and to ask their broker to establish which lenders are most likely to fund the transaction.

Gaining quick access to finance after the auction

Other buyers will only contact their brokers after they have already secured the property. In some ways this makes sense, as it ensures that work only goes into a transaction that will definitely happen. It does, though, mean that you have to move a bit quicker. This is a second area where the expertise of the broker comes in – specialist intermediaries are well placed to know which lenders are keen to lend, and can deliver the funds their client needs on a timely basis. That expertise is invaluable when the clock is ticking.

Finding pre-qualified lots

As mentioned above LendInvest has a partnership with auction site Lot11, where we pre-qualify certain lots that we are happy to lend against in upcoming Lot11 auctions. These lots are signposted with our branding.

To speak to one of our BDMs about auction finance call us on 020 7118 1133

If you are an intermediary interested in working with us, you can find out more at intermediaries.lendinvest.com