Auction finance for property developers
Auction finance is a great way for property developers to secure a below-market-value property, often from a motivated seller. It could even be suitable for first-time developers too, if you’ve got the right expectations from the beginning.
Auctions can also be a smart way for established developers to buy properties below market value – this is often critical to the success of a development where buying at the right price can make all the difference.
However, auctions can be a riskier way to buy property than the traditional channels, and properties are sold on tight schedules — which doesn’t leave you much time to do the necessary research and carry out your due diligence.
We have many practical tips for property developers, and some other specific steps for buying property at auction – read on to find out more about auction finance.
How can auction finance help property developers?
Putting up your hand and bidding on a property worth hundreds of thousands of pounds is a daunting prospect, even for experienced auction-goers. If you make the winning bid, you’ll usually have to pay a non-refundable deposit on the day, and you’ll have 28 days to pay the balance.
That means that the timeframe for auctions is much shorter than the traditional ways to buy property, and it can be difficult to get the funds together in time, even if you’ve got a lot of available equity in your property portfolio. Auction finance is a flexible product that can be tailored to suit individual needs, but the general idea is that you’ll walk into the auction room with an agreement in principle – and therefore clear budgets and criteria in mind.
How does auction finance work?
With a lot of properties nowadays 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. Here’s how auction finance works:
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.
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 or pie-in-the-sky.
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!
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.
Is auction finance right for me?
If you want to buy property at auction but your working capital is tied up in equity in your portfolio, auction finance is the logical solution. Or maybe you’ve got a decent amount of working capital in the bank but you’d like to aim for more growth, and buy a more valuable property for a potentially bigger return.
It’s also a good idea to consider your level of experience. From the lender’s perspective, property developers with an established track record of successful projects are much easier to lend to, because their risk is lower. While it’s possible to get finance if you don’t have much experience, it will often involve added security if you’re new to property development.
Overall, auction finance gives you the opportunity to add to your portfolio even if most of your capital is tied up in existing properties; so you can get involved in property auctions, one of the most exciting ways to get ahead on the property ladder. We’ve got more tips for developers who are new to auctions in our guide on buying property at auction.
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