The article refers to purchasing property at auction, the essential planning, and the steps required to complete a successful property acquisition. Although the general property market faces testing times, auctions are where deals can and are being done.
These circumstances have led to rapidly shifting criteria by lenders, with funding lines that were previously available either being withdrawn or altered beyond recognition; therefore, how can I assist you in raising finance? I manage a regional finance business with access to a panel of over 100 lenders, from high street banks and institutional investors through to merchant and private banks, private wealthy individuals, groups, and venture capitalists.
Whether you a seasoned property investor or a novice, there is no disputing property auctions are where extraordinary bargains are to be had for those with a keen eye for a deal. But how do you obtain finance in a market where LTVs ratios are falling without having to employ substantial amounts of your personal money.
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So why use an auction? There are many reasons people consider buying or selling at auction; they may want to move quickly, they may be looking for a plot of land for development, the property may involve repossession, or simply that they want a quick purchase without the risk of gazumping. Also, many buy to let investors consider auctions because of the variety of properties on display at any one time, and by nature, there is a good place to bag a bargain.
With repossessed properties, the lender who has taken ownership of the property owes a burden of care “an equity of redemption” to the client to whom they initially lent monies. This means in practice that a lender who repossesses will generally offer these types of property in an auction, and so they remain places where undervalue properties can be acquired.
Buying or selling properties at an auction can have several advantages for both the buyer and seller. Most of the delays associated with property transactions are eliminated, the auction and completion dates are fixed, and the sale contract becomes binding upon the fall of the gavel.
The following tips section of this article will focus on the property transaction primarily from the buyer’s perspective, emphasizing the lenders that operate in this market.
Tips
Inspect the property and do as much research as possible about the property and the neighborhood. There are house price sites on the web to find out how much similar properties have sold for.
Ensure you read all written material provided by the Auctioneer, the Legal Pack, and the HIP. It is important to fully understand the contents and the terms and conditions of the auction.
Ensure sufficient funds are available for the deposit, which will need to be paid at the auction, i.e., often 10% of the sale price, but you should check what the deposit will be before the auction. Also, check which payment methods are acceptable (as some methods of payment may not be acceptable such as cash or credit cards).
Most Property Auction Houses do not advertise to the public as they are still aimed at professional purchasers, so you will need to make inquiries on the Web or at your local estate agent to determine when and where a property auction might include properties of interest will take place.
Be prepared to move fast. Property Auctions take place only three to four weeks after the property auction catalog is first issued. If you are subsequently successful at auction, you will usually have between 14-28 days only to complete. A ten-day default period will follow this where the purchaser will be charged interest and can, in the worst-case scenarios, be used to extend the 14-28 day period. Check the Auction guide small print to see what penalties this will incur.
An intention to bid will need to be registered (either before the auction or in the auction room). If the bid is successful, the sales memorandum will need to be signed, and the deposit paid there and then.
The buyer will often be responsible for the insurance of the property from the moment the gavel falls. The date of completion when the balance of purchase price will be paid and possession will be taken will be stated in the conditions of sale.
If a property being sold does not make its “reserve price,” then although this is generally not disclosed, the auctioneer will state that the current bids are close to the reserve price. A subsequent conversation after the auction may allow you to purchase the property below the reserve price if the vendor agrees.
This final “tip” is worth looking at in some detail; the level of due diligence a bidder should perform before the auction itself. Historically, if a buyer had 20-25% of the purchase price in their back pocket, then they were relatively safe going into the auction, making a winning bid, and then worrying about arranging the rest of the monies at that point.
These days with funding lines restricted, it is worth making sure that funds will be available beforehand. Unfortunately, without a full valuation report, it is difficult for either an investment mortgage provider or a bridging lender to give the applicant a definitive decision as to the level of funds they can make available or the rates of those funds.
An agreement in principle can be indicated, but this will always be subject to the legal, due diligence, and valuation report. Although the legal due diligence cannot be arranged before applicants “winning bid,” one variable that can be eliminated is the valuation report. Therefore preparation boils down to whether or not the applicant should cover the expense of a valuation report even before they have become a successful bidder.
If the applicant is looking at several properties, then this can become an expensive exercise. Still, the ability of a valuation report to highlight potential lending problems and to get an independent valuation not solely based on the purchase price – makes, in our opinion, the purchase of a valuation report pre-auction invaluable.
There has been a change in the market with regards to the acceptability of taking existing valuation reports and having them retyped to the ultimate lender – for example, the largest company of surveyors in the country Connells no longer accept instructions for retypes, an instruction now has to be to a specific lender only. Likewise, a lender will almost always want to instruct the valuation themselves. This may mean that even if a valuation report has been prepared before the auction, the lender may require a second valuation report with the subsequent expense to the client.
The need for a second report can be minimized by using valuers generally acceptable on most panels, but there remain no guarantees. However, the initial valuation report should enable an applicant to pin down the lender to an exact loan amount bearing in mind no subsequent issues arise during the legal conveyancing, and any subsequent report comes in at the same value.
Funding lines
There are two lines of funding that can be used to complete an auction property purchase, a mortgage (either residential or investment) or a bridging loan. Each has its own specific advantages and disadvantages as follows.
Mortgages
Generally, a purchaser of a property at auction will not use it as their main residence, so this section will concentrate on investment or buy to let mortgages.
The main advantage when being used as a purchasing form of finance is that you can generally get a loan of up to 75% of the purchase price (so long as the rental coverage exists), and the interest rate will be very keen. Unless you were planning on reselling the property, then a buy to let mortgage would be the ultimate form of loan to be secured on the property, so by going straight into a buy to let mortgage, you avoid two sets of finance costs, the first finance cost of the loan used to acquire and the second of the buy to let mortgage itself. There are disadvantages of using buy to let finance, and they are as follows.
Speed
Although a buy to let mortgage can theoretically be put into place within 4 weeks (the general time scale of an auction purchase being 28 days), due to the underwriting process generally taking longer in the current economic climate, there are no guarantees that the mortgage will be in place before the 28 days are up, and you could therefore lose your deposit.
Mortgageability
A buy to let lender will need the property to be in a mortgageable state. If the property is damaged in any way, without electricity, plumbing, or even a kitchen/bathroom, the lender will not be able to secure a mortgage against the property.
Retention
Retention is a watered-down version of the previous disadvantage. We are seeing lenders’ increasingly retaining a proportion of the mortgage until the borrower meets certain pre-conditions. If, for example, the property is mortgageable but in a deplorable state, the lender may hold back, for example, £20,000 until the borrower has brought the property up to an “acceptable” standard. This may make completion impossible as the whole loan may be needed to make up the full balance.
LTV
A buy to let lender on a purchase transaction will lend as a percentage of the valuation or purchase price, whichever is the lower.
Rental Yield
Even if a valuation comes in on target allowing a buy to let provider lend the percentage required, if the rental yield comes in lower than the minimum required for that loan, this will reduce the loan amount available. If, for example, a £100,000 property has a £75,000 lend offered if the rental yield comes in over £400 and the rent comes in at £350, then the loan amount offered would drop to £65,000.
Bridging Loan
Due to these previous disadvantages of applying for a buy to let mortgage at acquisition, many property investors will seek to use bridging finance to complete the purchase and then buy to let mortgages refinance out of the bridging loan. The key advantage to a bridging loan is that it is quicker as an asset-based form of finance; there are fewer affordability hoops that an applicant has to go through to be judged applicable, and in many instances, the loan becomes, in essence, “self-cert.” A bridging loan can also be loaned as a percentage of the property’s Open Market Value, so if you have bought the property under market value, you can potentially borrow a higher percentage of the purchase price than with a buy to let mortgage. Be warned, however, that the days of 100% lending against the acquisition property are more difficult to arrange; the lender will want to see at least some client contribution even with a strong valuation report.
Certain bridging loans will allow you to use the equity in a secondary property to essentially top-up the loan to 100% of the purchase price, with a first charge on the property being acquired and a first or second charge on the additional security.
As with buy to let mortgages, there may be disadvantages when utilizing bridging finance, and the main ones are as follows. Finally, a bridging lender will not be put off by the property’s condition in the same way that a buy to let lender would be. So long as the asset has an open market value, despite its condition, then generally, a bridging loan can be arranged as a percentage of that value. Some funding lines even allow you to draw down further monies against an increase in the valuation of the property to help with the funding of any development works or a release of capital when the property is refurbished – allowing the developer to use these released monies to move onto their next project.,
Expense
For the bridging loan’s speed and relatively self-cert nature, you will pay a premium on the monies borrowed with rates of between 1-2% per month. In addition to these rates, there will be additional valuation fees, legal fees, set-up costs, and potentially exit fees. Unless the applicant is borrowing at a very low LTV, it is rare in the current climate for these fees to be “rolled up” into the loan so that the set-up costs will be deducted from the loan on drawdown loan will need servicing whilst outstanding.
Exit strategy
A relatively recent addition to buying to let mortgage provider’s criteria is that they will require a property to be held for a minimum period of 6 months before allowing an applicant to use their loan to pay back the bridging loan (there are new mortgage products available that don’t require this six-month rule). At that point, the buy to let loan can be borrowed as a percentage of the Open Market Value, but the applicant will have had to pay 6 months of bridging finance rates.
Retained Interest
As bridging lenders are aware of this refinance precondition, many lenders, to guarantee that they will have their loan covered for the 6-month period, will stipulate that 6 months interest is retained at source. That means on a gross loan that initially looked quite good at 65% of LTV, the net loan that ultimately ends up in the borrower’s hands can be as low as 55% LTV even though, of course, this now results in the borrower not having to service the loan over its term. There are advantages and disadvantages to whichever form of finance is being used to acquire a property at auction, and these relative merits change as the lending criteria themselves change.
