Using Auction Finance To Purchase UK Property

Using Auction Finance To Purchase UK Property

Islay Robinson

Around 18,000 houses are sold at auction annually in the UK – around 1 in every 45 homes. Auctions are also on the rise, with some £480m worth of property sold at auction in May 2022, nearly 25% more than in May 2021. Auctions are a great way to snap up undervalued property, purchase property to develop, buy sought-after real estate or expand an investment portfolio. Auction finance is faster and less challenging to arrange than a mortgage, which means it's a practical, efficient and easy way to finance a property purchase. 

What is auction finance, and how does it work?

You can't use a mortgage to buy a property at auction. Mortgages are designed to be used for the conventional property purchase process, which takes much longer than an auction. While it can take several months to buy a property on the open market, transactions involving auction properties are usually completed in a month. Because auction properties are sold so quickly, and funds to complete the deal are required in around 28 days, it's impossible to time the close of a mortgage with the exact date you need to pay for your auction property. Auction finance is fast to arrange, and you can draw down funds in just a couple of weeks, making it ideal for this kind of purchase. When you work with us to arrange finance ahead of an auction event, we will get you in principal offers. Then, if you win the bid, you will have funds almost instantaneously – usually in just a few days.

If you buy a property at auction, you must pay at least 10% of the property price immediately after winning the bid. In some cases, you'll need to put a higher deposit forward, and you'll need to be ready to pay this in cash. The outstanding amount will be due by a specific date, which is usually (at the latest) three weeks after your successful bid. If you don't have the finance by this time, you'll lose your deposit and the cost of any work or projects you have undertaken to identify if you want to buy the property.

Auction finance for businesses

If you're a business owner, you can use auction finance to buy commercial property, investment property (residential or commercial), mixed-use property, development sites (that you'll build from the ground up or extensively renovate) or land that is up for auction. Auction finance is beneficial because you don't have to use your company's capital to finance the loan. You'll also need to show lenders how the property you will buy at auction will support the continued financial success of your business.

Auction finance for individuals

Auction property often represents a great opportunity, especially if you can purchase undervalued real estate or there's a possibility to generate good returns. Lenders will want to understand your plan for making a profit or adding value to the real estate you're buying at auction, as well as how you will solve any challenges with the property. You'll need to be able to explain what your plans are and what work – if any – you will carry out. 

Types of property you can buy at auction

Properties are put up for auction in plenty of different circumstances, and you can use auction finance to buy property in all these situations. Overall, auctions are a great way to buy undervalued real estate or property with the potential for a high ROI. Many buyers won't want to take on these properties or don't see the value in them, so auctions are prime ground for bargains and high ROI projects. The types of property you can buy at auction include:

  • Complex property that owners can't sell via usual channels/via estate agents (short leasehold, unmortgageable property, unusual ownership structure, past legal challenges, etc.)
  • Properties that need to be sold quickly if the seller can't pay a mortgage or afford them anymore, or which are going through the foreclosure process
  • Property that represents an excellent investment for potential buyers in some way (revenue from commercial or mixed-use property, ROI opportunity, etc.) 
  • Properties that need considerable investment to redevelop, refurbish or bring into line with market demand
  • Commercial property (warehouses, office space etc.), mixed-use property or land
  • Development projects

While auction property is ideal in all the above scenarios, it's essential to understand that you will be responsible for fixing any challenges related to the property. Sometimes, this isn’t relevant (i.e., when a property is auctioned to facilitate a quick sale), but others will require more work. For example, if a property is unmortgageable, auction finance will depend on your ability to invest and redevelop so that it becomes mortgageable, and so on. 

Auction finance: top tips

Think about your exit

Auction finance is a type of short-term loan designed to allow you to buy property quickly. You'll need to repay the loan within twelve months, and have a plan of how you will exit the loan. Refinancing via conventional real estate finance or a mortgage or selling the property are some of the most common ways of exiting auction finance. However, other options will be available to you. A detailed action plan showing lenders how you will manage and repay the loan is imperative. 

Run your plans past an expert for advice

Auction properties can represent a fantastic opportunity to buy under-valued property or purchase property at low prices and then increase its value through redevelopment or renovation. It's also a great way to acquire an investment property or grow your real estate portfolio. Auction finance can cover both the property purchase (minus the deposit) and the development, although in some cases, you may need to put forward additional security. If you're redeveloping property bought at auction, you'll need to make sure you have a plan of action and that your development plans are feasible and can be accomplished with the finance you can raise. We can help review these plans and ensure they are viable.

Understand why the property is at auction

Sometimes, a seller will want to dispose of a property as quickly as possible, and they will put it up for auction to do this. In other cases, there may be more complex reasons why a property is being sold at auction, and you'll need to take on and solve those issues if you win the bid. It's also important to understand that buying a property at auction isn't a sure-fire way to get a great bargain – sometimes, a property will sell for more at auction than it would on the open market, and you need to make sure you don't overbid. Do your homework to understand why the property is at auction, its value, and why it's being auctioned, so you know you're making a sound investment decision.

Contact Enness

If you are considering buying property at auction or what to understand more about this type of finance, get in touch. We can talk you through our process, offer advice and insights on buying property at auction and explain more about the deals we can broker for you.