A Guide to Using Auction Bridging Loans and Bridging Finance:
Auction bridging loans and bridging finance are common methods for funding the purchase of properties at auction. Because of an auction’s fast-paced environment and the common requirement for quick payment, these types of loans help bidders secure the funds they need to bid with confidence.
While these loans are very useful, it is also important to understand how they work in terms of auction purchases. Before applying for an auction bridging loan or bridging finance, there are some key steps that you should keep in mind to help ease and streamline the process.
View the Property before Bidding
Auction houses often set aside specific dates and times for bidders to view properties that will be sold. This is most often true when the auctioneer expects strong interest and bidding activity in a specific property.
If this opportunity is available, it is vitally important that you take it – physically inspecting the property will help you determine the investment you are willing to make based on the property’s condition, structural defects, and any other issues that may be present. Determining what you feel the property is worth will help you consider and apply for the right amount of funding for an auction bridging loan or bridging finance.
Research the Value of the Property
Several factors determine a property’s open-market value. For investment properties, the rent in the area will also play a role. It is important to thoroughly research the value of any property before purchasing it and to determine your maximum bid.
Some resources, such as the Internet, local real estate agents, and public records, can help bidders fully understand the property’s value. All auction lots must have a guide price that provides a general idea of what the seller is looking for in terms of price, in addition to a reserve price that is pre-agreed before the auction.
Have the Property Valued and Approved before Auction Day, When Necessary
If it is crucial to have financing for an auction purchase in place before bidding begins, you will also need to have the property valued and approved in advance. It is important to remember that access to the property may be limited by the sellers or the auctioneer and that the chosen lender will need a few days to review any reports and decide on the loan.
When time is of the essence, it may be best to enlist the help of a finance broker to expedite the process. The more traditional way bidders work is to maintain a cash reserve on bid day – this allows them to pay the purchase price in full with their own resources or to require only a small amount of funding to make the purchase possible.
Follow Legal Due Diligence
The property seller’s solicitors will always provide copies of any legal paperwork associated with the sale. These documents include copies of counterpart leases, title deeds, and planning permissions when appropriate. Although these documents are usually provided as a courtesy, there may be a modest charge for providing this information.
It is best practice to always consult your own solicitor to review these documents to ensure everything is within legal limits and the property remains a good investment. It is important to remember that several issues can arise between the completion of the bid process and the final payment for the property, so having legal counsel available to assist with these pitfalls is a great way to ensure a smoother transaction.
Obtain Heads of Terms before Any Auction
If funding needs to be arranged before an auction, it is important to obtain heads of terms from a lender before bidding begins. A finance broker can help you partner with the best lender based on your unique circumstances, helping you obtain the best possible deal and terms for your loan.
It is important to note that not all short-term lenders are created equally. Although they may be similar, each has its own unique lending strategy. Finance brokers constantly monitor how lenders position themselves and have an idea of which partnership will work best for their clients.
This is also important for the completion period associated with the auction purchase. Since completion periods usually last 28 days, it is important to have the necessary funding in place in advance.
Develop an Exit Route
When using an auction bridging loan or bridging finance, lenders will often ask for an exit route or exit strategy before agreeing to the loan terms. An exit route is simply a statement of how you intend to repay the loan. Most often, borrowers cite the sale of a renovated property as their exit strategy – many auction properties are purchased at a low cost, refurbished, and then sold on the open market for a profit.
If the plan is for the borrower to live in the auction property, another exit strategy or exit route will need to be specified. Often, in these situations, obtaining a mortgage becomes the exit route.
Be Disciplined During the Bidding Process
Once you have chosen a property you are interested in, done all of your research, know the property’s general value, and know how much you are willing to invest, it is important to stick to your bidding plan during the bidding process. It is easy to get carried away during bidding, as the heat of the moment and the excitement in the air can take over, leading many novice bidders to go far above their maximum bid price.
Aside from staying in control, there are some other simple tips to help keep your bidding on track. First, always remember that last-minute changes to property details will be announced before bidding starts – listen carefully for anything that may affect your maximum bid.
There are a number of different ways a bid can be made during the auction – raising a hand, using a paddle, or using the catalogue are all ways to get your bid recognised. Also, you can announce an alternative bid from what the auctioneer is asking for, in which the auctioneer can then reject or accept.
Once you have secured the highest bid and successfully won the property, you will be asked to complete a bidding slip that requests the name and address of both the buyer/auction winner and their solicitor. The auction clerk will then prepare a contract for review and signature before leaving the auction house, along with a 10 per cent deposit.
Unless prior arrangements have been made with the auctioneer, they will generally not accept personal or company checks.
Auction bridging loans or bridging finance are an excellent way for auction-goers to fund their property purchases. This short-term funding can be arranged quickly, helping bidders gain the confidence they need to win the properties they are interested in.
But before applying for this type of funding, it is important to understand how the auction process works, how much funding is required, the terms desired for the loan, and how the loan will be repaid. To make this process easier, it is always recommended that bidders and borrowers seek advice from professionals such as solicitors and finance brokers.
It is also important to take a hard look at your own situation before embarking on a bridging loan.