Knowing how to finance an auction purchase is easy in principle!
However, to make sure preparations go smoothly, you first, need to be aware of how property auctions operate.
Here are some pointers:
Even though you don’t know at what price the bidding will stop:
1. You have to possess 10% of the purchase price to exchange contracts when the hammer falls, and;
2. You have to complete within 28 days.
Nonetheless, be wary as some auctions stipulate 14 days for completion, so it’s important to check this timeline.
In regard to ‘What type of finance is best?’, the tight deadlines can make it very difficult to get a standard mortgage or Buy to Let mortgage within 28 days. Unless you are a cash buyer, a bridging loan is the next fastest solution. These can normally be completed on time subject to the valuation and legal process being pushed through quickly.
Furthermore, with many lenders, you can instruct these before, or on the day of the auction to speed up the process.
However, keep in mind that finance is not guaranteed. Even though you have an Agreement In Principle (AIP) the bridging lender may still pull the plug after you’ve exchanged if they find any issues with either your application or the property.
It’s also important, with the use of short-term lending to evidence a viable exit strategy for your bridging loan. (In general, 9-12 months is the average term length, with longer terms up to 24 months depending on individual circumstances). In most cases, where property or land is involved the exit strategy is usually a re-mortgage or the sale of the asset.
In summary, buying at auction can be a fantastic way to find a bargain, but can be high risk. The biggest challenge is the timing and you need to keep this at the forefront of your plans.