Bridging & Commercial has spoken to a number of auction finance specialists to discover the most common issues auction buyers face and how to avoid them.

Securing finance for an auction purchase

Scott Hendry, director of auction finance at Together, felt the most common issue was securing finance.

“A buyer may agree an amount with their mainstream bank, but then find once they have won the bid on a property that the bank can’t process the finance or mortgage in time to meet the seller’s deadlines.”

These issues were echoed by Matthew Tooth, chief commercial officer at LendInvest, who felt the pressure of tight timeframes was an unfortunate by-product of auctions, but believed the solution was for buyers to take their time and plan.

“First, advise a client to choose a solicitor that has experience [of] dealing with auction financing and/or bridging loans that require delivery within a tight timeframe.

“The buyer should [fulfil] everything expected of them on time, too.

“This can range from paying valuation or legal fees and filling out forms to answering enquiries on the purchase.

“If the period for completion expires, the vendor can give notice; failing to [complete] before that notice period ends can result in losing the deposit and facing legal fees and compulsion to complete.”

Greg Hegarty, bridging expert at Finance 4 Business, said as a distributor, it understood the need for speed when securing the right finance for an auction purchase.

“We ask the client at the outset what the loan is for, so if it is an auction purchase we are aware speed is key to completion.

“By understanding the purpose of the loan, the lenders we [would] potentially use [can] be identified.”

What to do when paying over the guide price

Scott felt that buyers needed to be aware of guide prices, as although an agreement in principle can be agreed before an auction, properties will often sell for more than the guide price.

“To avoid being caught out by the tight timescales, auction buyers need to be prepared and should talk to auction finance specialists so that they go into the auction room with a decision in principle on a particular lot and can bid with confidence up to the agreed bid price.

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“In order to avoid overspending at auction, buyers that have an agreement in principle need to stick to their budget and remember that the guide price is just an indication – it could go for significantly more – so it’s important not to exceed your limit, as once that hammer goes down, there is a legal obligation to complete the purchase and a 10% deposit to pay on the day.”

Online research can help avoid complications

Matthew added: “Carrying out as much research as possible for your client – using online selling giants and house pricing sites – can provide them with that extra level of security.

“When dealing with these outlets, it is always best to monitor ‘sold prices’ rather than ‘marketing prices’.

“Local estate agents can also offer a good insight into appropriate comparables along with providing their thoughts on the value of the lot as it stands pre-auction.”

Knowing the property is crucial

Reading the legal pack

Steve Smith, business development manager at Roma Finance, felt that reading the legal pack was very important during an auction finance purchase as it contained all the details of the properties tenure, conditions of sale and any planning permission related to it.

“By understanding more about the property, it will help the customer know what they can do with the property going forward – for example, if they want to develop it or change its use – and it gives us as lenders insights into the viability of the transaction.

“It's also vital to review tenancy agreements for buy-to-let property and to check if there are any restrictive covenants which may affect the future development of the property.”

Scott pointed out that the condition of the property can also pose an issue for traditional lenders, and if a property is deemed uninhabitable, the buyer may not be able to borrow from a high street bank.

“Buying houses at auction that need refurbishing is popular, but many mainstream lenders may not be prepared to offer finance if the property is in a state of disrepair.

“Therefore, we have clients come to us in the short-term to purchase the property, then once it is renovated and had the necessary refurbishments made, they refinance with a mainstream provider.”