A Guide to Using Auction Bridging Loans and Bridging Finance:
Auction bridging loans and bridging finance are a common method used to fund the purchase of properties at auction. Because of an auction’s fast paced environment, and very common requirement of quick payment, these types of loans help bidders to secure the funds they need to be confident when bidding on a sale.
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 will often set aside specific dates and times for bidders to go out and view the properties that will be up for sale. This is most often true when the auctioneer believes there will be a lot of interest and bidding activity on a specific property.
If this opportunity is available, it is vitally important that you take it – physically inspecting the property will help you to determine what investment you are willing to make based on the look of the property, structural defects, and any other issues that may or may not be present. By determining what you feel the property is worth, it will help you to consider and apply for the right amount of funding for an auction bridging loan or bridging finance.
Research the Value of the Property
The open market value of a property is determined by a number of different factors. In the case of investment properties, the rent that is associated with the area will also play a role in determining the open market value. It is important to fully research the value of any property before considering purchasing it, as well as determining what your maximum bid amount will be.
There are a number of resources available to help bidders gain a full understanding of the property’s value, such as the Internet, local real estate agents, and public records of the property. All auction lots are required to have a guide price that helps to provide a general idea of what the sellers are 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 the financing for an auction purchase in place before the bidding begins, you will need to have the property valued and approved in advance as well. It is important to remember that access to the property may be limited by the sellers or the auctioneer and that the lender that is chosen will need a few days to review any reports and make a decision on the loan.
When time is of the essence, it may be best to solicit the help of a finance broker to ease and quicken the process. The more traditional way that bidders work is by having a cash reserve available on bid day – this allows them to pay the purchase price in full with their own resources or only require 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 is sometimes a modest charge for the provision of this information.
It is a best practice to always consult your own solicitor to review these documents in order to ensure everything is within the legal limits and the property is still a good investment. It is important to remember that there are a number of issues that 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 prior to an auction, it is important to obtain heads of terms from a lender before bidding begins. A finance broker can help partner you with the best possible lender based on your unique circumstances, helping you to obtain the best possible deal and terms for your loan.
It is important to note that not all short term lenders are created equally and although they may be similar, each has their own unique lending strategies. Finance brokers are constantly monitoring how lenders position themselves and have an idea of which partnership will work best for their client.
This is also important when it comes to the completion period associated with the auction purchase. Since completion periods usually last 28 days, it important to have the proper funding in place ahead of time.
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 about how you intend to pay back the loan. Most often, borrowers site the sale of a renovated property as their exit strategy – many auctions 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, the obtainment of a mortgage will become 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 excitement in the air tends to take over, causing many novice bidders to go far above and beyond 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 in the property details will always be announced before the bidding start – 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, paddle or catalogue during the auction are all ways to get your bid recognized. 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 which will ask for the name and address of both the buyer or auction winner and their solicitor. The auction clerk will then prepare a contract which will need to be reviewed and signed before leaving the auction house as well as the payment in the form of a 10 per cent deposit.
Unless previous arrangements were made with the auctioneer, they will generally not accept personal or company checks.
Auction bridging loans or bridging finance are a great way for auction goers to fund their property purchases. This short term funding can be arranged quickly, helping to give bidders the confidence they need to win the properties they are interested in.
But, before applying for this type of funding, it is important to know how the auction process works, how much funding is required, what terms are desired for the loan, and how the loan will be repaid. In order to make this process easier, it is always recommended that bidders and borrowers seek the advice of professionals such as solicitors and finance brokers.
It is also important to take a hard look at your own situation before embarking with a bridging loan.