When purchasing a property at auction, one of the top ways to buy is through a bridging loan if you do not have the cash immediately available for the purchase. Auction purchases require funding fast, typically within 28 days of offer acceptance.
Bridging finance for auctions helps bridge the gap until a long-term traditional mortgage can be secured or the sale of the auction property or another property used for collateral is completed to exit the bridging loan.
Purchasing Auction Properties with Bridging Finance
Bridging finance for auctions can be arranged before an auction, at the sale itself, or shortly after a successful bid gets accepted.
Due to the stringent qualifications of a traditional loan, long-term financing can take a long time to complete. In contrast, bridging loans can be completed within a few days to a few weeks at most.
When purchasing auction properties, time is of the essence, and if you do not have the cash on hand for purchase, a bridging loan is the best route for financing the purchase.
If you’re considering purchasing a property up for auction and using a bridging loan for auction purchase, it is a good idea to have the property valuation completed and loan approval before attending the auction.
This way, if your bid does not get approved at auction, you would only lose the cost of the valuation fee.
Alternatively, if your submission does get accepted, but you did not secure financing approval beforehand, there is the possibility that you may be unable to obtain financing and then you would lose your down payment that is required upon bid acceptance.
A typical down payment after acceptance is 10% of the purchase price, with the rest of the debt in full required to get paid within 28 days.
If you already have your approval on your bridging financing for auction before bidding, it allows you to move quickly to the next stage of purchasing if your bid is accepted.
Auctions can be completed in person at an auction house, at the property, or bids can be submitted online.
Real estate auctions begin with a set minimum sales price and can only go up from that point depending upon how many bidders want the property and the amount they are willing to pay or drive up the bid.
It is good to get your loan amount approved beforehand if you plan to use a bridging loan for auction so you know the limit of how high you can bid for the property, and take into account any repairs and renovations that may be needed on the property to ensure the loan will also cover those costs unless you are paying for refurbishments out of your pocket.
Bridging financing for auctions can also cover commercial properties and multi-family units which could be renovated (if needed) and rented out for an income or sold for a profit. While most auctions are foreclosed properties and short-sales, there can be auctions on non-distressed properties as well.
Auction Property Due Diligence
Properties purchased at auction typically need work done on them, so it is worthwhile to view the property with a builder, architect, surveyor, and other construction workers (if required) to gauge the work needing to be done and estimate the full costs involved to ensure your loan will cover these costs and they will not need to get paid out of pocket.
It will also help to establish a time frame of when the work will get completed so that you can secure a reasonable loan term. If for any reason you need an extension of the loan term, or you cannot exit the loan in the established time frame, you could face hefty fees or possible repossession of the property.
Getting the property reviewed by construction and rehabilitating persons before loan application when using bridging finance for auctions is also an excellent way to ensure the cost would remain within the scope and the project would be viable and profitable in the long term.
Other essential items to check before bidding at the auction are for title deeds, local authority searches, and any vital property information you can obtain from the auctioneer or auction catalogue.
You should also complete a legal search to see if there are any restrictive covenants as those could impede on any renovations, conversions, or building you want to do at the property.
Auction Property Development and Renovations
Bridging loans for auctions can also be used to purchase land at auction for a new property build. Bridging lenders will accept a loan with or without approved building plans, while most traditional lenders require the building plan to be approved before the loan application.
Besides being used for property building and development for properties purchased at auction, bridging loans for auction purchases are also typically used for the renovations needed on a derelict property purchased at auction.
Properties sold at auction are often in considerable disrepair and require a fast sale with their defects needing repair immediately to make them mortgageable and habitable.
It is advisable to have your investment objective and timeline in place before you bid on a property when using bridging finance for auctions.
Your intention, such as selling the property for a profit or converting to apartments for rent, will affect the size, location, price, and condition of the properties you are able and wanting to bid on.
Because a bridging loan is based on the value of the asset, the Loan to Valuation amount can be found on the property’s value after renovations, and refurbishments get completed. It is what makes auction properties and bridging finance for auctions appealing to borrowers.
The property can be financed with a bridging loan at auction for a low price, funds from the loan can also be used for renovations and repairs to raise the value of the property, and then the property can either be refinanced into a long-term traditional mortgage or sold for a profit while paying off the bridging loan.
While rare, sometimes a property is not suitable for using a bridging loan for auctions purchase. In this case, any other properties that you own, personal or commercial, would be eligible to be used as security and collateral for a bridging loan.
If your goal is to refurbish and sell the auction property purchased for a profit, then you would need to look for properties that would have a high after repair value. ARV is the value and price of the home after renovations get completed.
The goal for investors who purchase auction properties, renovate and sell them, is to have an ARV around 30% higher than their purchase price and also to have as short of a timeline for renovations to be completed as fast as possible. The longer the timeframe, the higher the carrying costs, so it is crucial to complete any renovations quickly.
While you would be looking more at the LTV on a long-term loan, the same goes for long-term auction purchases as well in needing a short timeline. If a property takes too long to renovate, and renovations are required, then it will remain unrented if it is a multi-family property or unmortgageable, potentially delaying your exit plan on the bridging loan for auction used.
Benefits of Purchasing Auction Properties with Bridging Finance
Bridging loans for auctions are not usually based on income or credit like a typical traditional mortgage. It means that a bridging lender will not require employment history and gruelling credit checks which can be time-consuming and delay the loan.
Many auction properties are also deemed not suitable for mortgages. When a property is subject to auction, it typically is in dire shape or may have significant defects. It may also be without a kitchen, bathroom, or both. A traditional mortgage lender will not accept such property for a mortgage loan, but a bridging loan company will.
Because of this acceptance of reconstructive properties, a bridging lender will accept and consider properties that require substantial refurbishment or even conversion by the purchaser for selling or refinancing.
You can also borrow 70-75% of the Loan to Value (LTV) of the property, and sometimes depending upon the lender, up to eighty percent of LTV.
However, higher LTV or a riskier loan might have a higher interest rate. Based on the lower price of auction properties, and ultimately lower value, it might be worthwhile to use another property you own as collateral or additional security against a bridging loan for auctions. In doing so, you would be able to borrow more on credit or secure a lower interest rate on loan.
A bridging loan is a short-term loan, and the term is generally twelve to eighteen months.
The exit of the bridging loan is usually either by selling the property at a profit and paying off the loan at that time or by refinancing the property loan into a long-term traditional mortgage which would pay off and end the bridging loan.