The article refers to purchasing the 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 made. These circumstances have led to rapidly shifting criteria by lenders, with funding lines that were previously available either being withdrawn or altered beyond recognition. 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 to merchant and private banks, wealthy private individuals, groups, and venture capitalists.
Whether you’re a seasoned property investor or a novice, no disputing property auctions are where extraordinary bargains will be had for those with a keen eye for a deal. But how do you obtain finance in a market where LTV ratios are falling without having to employ substantial amounts of your money?
So why use an auction? There are many reasons why 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 they simply 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. In practice, a lender who repossesses will generally offer these types of property at properties, so they remain where undervalued properties are acquired.
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“Look for proximity to most important roads, public transportation, and most significantly, faculties,” says Abhi Golhar, host of Real Estate Deal Talk in Atlanta. Research rents within the location you need to pursue, both in as-is condition and maintenance or upgrades, provides Chris Taylor, a dealer with Advantage Real Estate in Boston. “I discover the biggest mistake traders make is overestimating what their property is worth, which ends up in vacancies and under-market rents,” Taylor says.
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 determine 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 auction’s contents and terms and conditions.
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, such as cash or credit cards, may not be good).
Most Property Auction Houses do not advertise to the public. 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 property interest will take place.
Be prepared to move fast. Property Auctions occur 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 and 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.
On the auction day, 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 must be signed, and the deposit will be paid then and there. When the gavel falls, the buyer will often be responsible for the property’s insurance. The completion date, when the balance of the 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 bidder’s level of due diligence should be performed 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 restricted funding lines, it is worth ensuring that funds will be available beforehand. Unfortunately, without a full valuation report, it is difficult for an investment mortgage provider or a bridging lender to give the applicant a definitive decision about 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 the 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 looks at several properties, this can become an expensive exercise. Still, the ability of a valuation report to highlight potential lending problems and 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 accepts instructions for retypes, an education 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 using values 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 following report comes in at the same value.
Funding lines
Two lines of funding can be used to complete an auction property purchase: a mortgage (either residential or investment) or a bridging loan. Each has its specific advantages and disadvantages, as follows.
Mortgages
Generally, a property purchaser at auction will not use it as their main residence so that this section will concentrate on investment or buy-to-let mortgages. When used as a purchasing form of finance, the main advantages are 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 low. 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 deal 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 agreement to allow mortgage itself. The disadvantages of using investment to finance are as follows.
Speed
Although a buy-to-let mortgage can theoretically be put into place within four 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. 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, without electricity, plumbing, or even a kitchen/bathroom, the lender will not secure a mortgage against the property.
Retention
Retention is a watered-down version of the previous disadvantage. Lenders increasingly retain a proportion of the mortgage until the borrower meets certain preconditions. If, for example, the property is mortgageable but deplorable, the lender may hold back, for instance, £20,000 until the borrower has brought the property up to an “acceptable” standard. This may make completion impossible as the whole land may be needed to make up the full balance of funds.
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 buyer to let the provider lend the percentage required, if the rental yield comes in lower than the minimum necessary for that loan, this will reduce the loan amount available. If, for example, a £100,000 property has a £75,000 loan offered, and if the rental yield comes in over £400 and the rent comes in at £350, then the loan amount provided 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 use deal-to-allow mortgages to refinance out of the bridging loan. The key advantages to a bridging loan are that as an asset-based form of finance, it is quicker; 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. 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. Finally, a bridging lender will not be put off by the property’s condition like a buy-to-let lender would be. So long as the asset has an open market value, despite its condition, a bridging loan can generally be arranged as a percentage of that value.
Some funding lines even allow you to draw down further monies against an increase in the property’s valuation to help fund any development works or release capital when the property is refurbished – allowing the developer to use these released monies to move on to their next project. As with buy-to-let mortgages, there may be disadvantages when utilizing bridging finance, and the main ones are as follows.
Expense
For the speed and relatively self-cert nature of the bridging loan, you will pay a premium on the borrowed money with rates of 1-2% per month. In addition to these rates, there will be additional valuation fees, legal fees, set-up costs, and potential exit fees. Unless the applicant borrows 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 the drawdown. The loan will need servicing while 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). The buy-to-let loan can be borrowed as a percentage of the Open Market Value, but the applicant will have had to pay six months of bridging finance rates by that point.
Retained Interest
As bridging lenders are aware of this refinance precondition; many lenders guarantee that they will have their loan covered for six months and stipulate that six months’ interest is retained at the 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 used to acquire a property at auction, and these relative merits change as the lending criteria themselves vary.
Certain aspects of the depressed property market currently being experienced make auction purchases more attractive than they were. However, these same conditions affect the availability of the remaining funding lines. Always perform minimal homework even before approaching a broker/lender with some knowledge of the security and what you hope to do with it; the broker/lender can fill in the gaps in your understanding of what products are still available and what criteria may have changed in your favor.
There is nothing that an underwriter likes better (save apart from a concrete exit strategy) than seeing a current valuation report on the property that they are being asked to give an agreement in principle on for a lending decision. A surveyor on their panel supplies the valuation report, which is much better. For the sake of losing a reasonable sum of money, this valuation report may cost, but the information it provides may save you thousands in the long run.
I have found ways to assist in nearly every circumstance and am happy to speak with you about financing your next or even your first auction property purchase. My colleagues can assist you in structuring your portfolio in a tax-efficient manner, minimizing capital gains and other taxations. Thank you for reading this property guide. I hope the information contained within will prove to be profitable for you. I urge you to take action and start creating your property portfolio plan and consider your next or first auction purchase Auction belongings without money Down.
