Auction finance

As with all funding solutions, there are pros and cons. Here are some of the cons:

High interest rates

As a form of short term lending, auction finance can come with higher interest rates than, say, a commercial mortgage. Higher interest rates can cut into your profitability and, over time, limit growth.

Potential for penalties

Auction finance is meant to be repaid within a short period of time, failure to pay within this period can result in penalties, fees, and increased interest rates. Not to mention, a possible hit to your personal or company credit score.  

Greater risk

There’s more pressure to refinance than with a commercial mortgage or cash payment, and having the funds ready to go can result in impulsive bidding. Take extra care when formulating your exit plan, and ensure it is your north star when selecting, and bidding on, the property of your choice.

Yes, in fact, property development is one of the prime use cases of auction finance. Developers often need to move quickly to secure the most suitable properties and land plots for their development needs, auction finance enables them to do that.

You will likely have to repay the loan within 12 months, however, the exact time frame will depend on the lender, the property, and your circumstances as a company. If you have a specific period of time in which you’d like to repay the loan, include this in your exit strategy, along with your intended method for repayment.

Possibly, and if you are planning to use a mortgage as part of your exit strategy for the property, this is definitely a question you should take into consideration.

Gaining access to auction finance requires applying through a lender, which involves a hard credit check being added to your personal or company credit score. This can drop your creditworthiness in the short term, which can impact your ability to acquire further funding at favourable rates from another lender.

The loan will also appear as short term debt on your credit report. Lenders could see this as an existing loan that needs repaying, which can impact their assessment of your affordability and ability to handle further borrowing. Consider the timing when applying for both auction finance and a mortgage.

Yes, it’s highly likely auction finance will impact your company or personal credit score, possibly both. However, that’s not necessarily bad news. While hard credit checks will be added, and more debt will feature on your report, building a stable credit history can actually build your score up. Making regular, timely payments can demonstrate to future lenders that you can be trusted with more funding.

Not at all, in fact, auction finance is designed to give you flexibility in the auction house. It works through a pre approval process, where you’re approved, in principle, for the amount and the conditions of the loan. Then, once you’ve found the property you’d like to bid on, you can bid confidently, knowing the funds are ready to go.

Auction finance can be used for a range of property types, including land, houses in need of renovation, buy to let properties, warehouses, hotels, pubs, farming land, and more.

Yes, whether you are buying land to build on, or purchasing a farm to raise cattle on, auction finance could help you secure a lot of land at a better price.

You will likely need around 25% of the value of the property as a deposit to secure the loan. It’s also probable that you will need 10% upfront on the day to pay the auction house.

Most lenders will ask for an exit strategy during the application process when you apply for auction finance. An exit strategy is your way of showing the lender how you will repay the loan. Examples of an exit strategy could include your intention to apply for a commercial mortgage, get property development finance, or resell the property at a later date.

Auction finance and business mortgages are both designed to facilitate the purchase and development of properties, however, they differ in several distinct ways. For starters, and perhaps most importantly, commercial mortgages are long term loans whereas auction finance is short term funding.

Commercial mortgages tend to have lower interest rates than auction finance but are also much slower to apply for and gain funding from. Auction loans are specialist, targeted loans that require an exit strategy to apply for, whereas commercial mortgages offer stability and recurring loan repayments, and require a pre-chosen property to apply for.

There are several ways you can improve your chances of securing auction finance, and these steps have the added benefit of improving your chances of gaining more favourable terms. For starters, focus on developing a solid, well thought out, evidence backed exit plan, this helps show the lender how you intend to repay them. 

You could also work on improving your credit score by making regular, consistent repayments and keeping your credit utilisation low. Finding a wide range of possible lenders could also help you explore more options, possibly enabling you to find a lender who will approve your application at a rate you’re happy with. A broker, like Funding Options by Tide, could help you do this in the most efficient way. 

Auction Finance is a form of bridging loan used to buy a property at auction and complete the purchase quickly.

Auction purchases generally have to be completed within 28 days of the auction. In general, if you want to buy a property the conventional way, it is unlikely to be arranged within that period.

The auction house will usually ask you to pay 10% of the purchase price. In addition, auction fees will be payable in the case of a successful bid.

With a lot of properties clearing six figures in value, even a 10% deposit can be a significant chunk of cash. Property auction finance can help in a number of ways, starting long before you step into the auction itself.

With auction finance, you can arrange the funding in advance, so before the hammer falls you know how much your budget is, and even what specification of property the lender will fund.

There are several steps to secure a property at auction, including:

Planning and research

The first stage to getting auction finance is to plan what type of property you’d like to add to your portfolio and find a specific auction to attend. Then you can draw up a shortlist of properties you’re interested in from that specific auction and present the case to a lender.

Provisional acceptance

The next step is to go through the lender’s provisional approval process, which might involve credit checks, property valuations, and a look at your income, for example. If you’re a seasoned developer, this should be a straightforward process. If you’re new to property development, you could still get auction finance, but you’ll have to make sure your proposal isn’t too ambitious. Talking to a finance professional might also be a really good way to find out if your plans are realistic.

Choosing targets

With conditional approval from the lender, you’ll often have a set of criteria to follow for the property you’ll try to win at auction. For example, you might have an agreement in principle to finance 90% of a three-bedroom property worth between £200,000 and £225,000 — and in that scenario you’d need to fund the deposit yourself, which would be £20,000.

The criteria agreed with a lender might be more specific than that, or more flexible if you have a strong track record of previous developments. Once you have this agreement in place, you can start narrowing down your search for potential targets at the auction.

Closing the deal

Once you’ve gone to the auction and made the winning bid on a suitable property (which is certainly easier said than done!) you’ll have to put down the deposit. From the day the deposit is paid you normally have four weeks (28 days) to pay the remaining balance. Of course, with auction finance in place, this is paid by the lender. If you reach this point, aside from the routine legal process, you’re funded!

Finalising

Having said that, you can’t expect to put your feet up and wait for completion. You’ll need to keep in touch with the lender, the seller of the property, and your solicitor, to make sure things are progressing as they should. If all goes to plan and you’ve done the right research, you’ve just added a new property to your portfolio.

Depending on the type of property you are looking to acquire, auction finance might be the best option available. If you want to buy a property at auction but your working capital is tied up, auction finance could be a good alternative. Or maybe you've got positive working capital, but you'd like to expand your property portfolio.

Auction finance allows you to build your property portfolio even if most of your capital is locked into existing properties. In many cases, your credit history will be considered before bridging finance can be available.