The article refers to purchasing property at auction, the essential planning and steps required to complete a successful property acquisition. Although the general property market faces testing times auctions are a market where deals can and are being done.
These circumstances have led to rapidly shifting criteria by lenders; with funding lines that were previously available either being withdrawn or altered beyond recognition, therefore how can I assist you raising finance? I manage a regional finance business with access to a panel of over 100 lenders, from high street banks and institutional investors through to merchant and private banks, private wealthy individuals, groups and venture capitalists.
Whether your a seasoned property investor or a novice, there is no disputing property auctions are where extraordinary bargains are to be had at for those with a keen eye for a deal. But how do you obtain finance in a market where LTVs ratios are falling without having to employ substantial amounts of your personal 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 simply that they 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 a good place to bag a bargain.
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With properties that are re-possessed the lender who has taken ownership of the property owes a burden of care “an equity of redemption” to the client who they initially lent monies to. This means in practice that a lender who repossesses will generally offer these types of property in an auction and so they remain places where under value properties can be acquired.
Buying or selling properties at auction can have a number of 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.
This following tips section of this article will focus on the property transaction primarily from the buyers perspective with an emphasis on the lenders that operate in this market.
Inspect the property and do as much research as possible about the property and the neighbourhood. There are house price sites on the web to find out 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 contents and the terms and conditions of the auction.
Ensure sufficient funds are available for the deposit which will need to be paid at the auction i.e. often this is 10% of the sale price but you should check what the deposit will be before the auction. Also check which methods of payment are acceptable (as some methods of payment may not be acceptable such as cash or credit cards).
Most Property Auction Houses do not advertise to the public as they are still aimed at professional purchasers so you will need to make enquiries on the Web or at your local estate agent to determine when and where a property auction that might include properties of interest will take place.
Be prepared to move fast. Property Auctions take place only three to four weeks after the property auction catalogue is first issued. If you are subsequently successful at auction you will then have usually between 14-28 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 prior to the auction or in the auction room). If the bid is successful the sales memorandum will need to be signed and the deposit paid there and then.
The buyer will often be responsible for the insurance of the property from the moment the gavel falls. The date of completion when the balance of 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 it’s “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 is in agreement.
This final “tip” is worth looking at in some detail; the level of due diligence a bidder should perform prior to 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 funding lines restricted it is worthwhile making sure that funds are going to be available beforehand. Unfortunately, without a full valuation report it is difficult for either an investment mortgage provider or a bridging lender to be able to give the applicant a definitive decision as to 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 the valuation report. Although the legal due diligence cannot be arranged prior to an applicants “winning bid” one variable that can be eliminated is the valuation report and 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 is looking at a number of properties then this can become an expensive exercise, but the ability of a valuation report to highlight potential lending problems, and to 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 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 accept instructions for retypes, an instruction 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 prior to the auction the lender may require a second valuation report with subsequent expense to the client.