Bridging the finance gap at auction

Property investors buying at auction must have their finance in place before the hammer goes down.

The rule at auctions is the winning bidder must pay a 10% deposit on the day of the auction and the balance within 28 days.

Failing to complete the deal generally means losing the deposit.

Seasoned auction buyers have their finance sewn up before the day of the auction – they have a bid ceiling and the cash available for the deposit.

Doing a property deal at auction needs some planning before the big day.

First step is setting a bid ceiling – inspect the property, price any refurbishment work and decide what the home is worth to you as an investor and do not pay a penny more.

If you have the cash, then you can relax until the day of the auction.

If you do not have the cash to buy on the day, then speak to a bridging finance firm.

Bridging finance is short-term lending designed to secure the purchase of a property while leaving some breathing space to arrange longer term finance from a bank or building society.

The ‘bridger’ will offer funds at a low loan-to-value – often no more than 70% of the valuation. To set the price, the bridging firm will send in a surveyor.

The buyer’s credit status is not so important as the property valuation, which is why arranging bridging is so quick.

Some firms promise offers within seven days.

Once you have an offer from the bridging firm, the rest of the funds and any fees come from the buyer’s bank account.

Some bridging firms offer ‘rolled up’ interest, which means nothing is paid until the end of the loan term.

Most bridging runs for six months to give the buyer time to complete any refurbishment and arrange a sale or refinance to pay back the loan. This is often termed the ‘exit’.

Bridging firms will often lend on properties that other banks or building societies will not consider – but at a price with high fees and interest rates because they know the buyer has nowhere else to go for funding.

Once a buyer has an offer of funding from a bridging firm, working out the bid ceiling is easy – and the valuation is a big help in confirming how much a property is worth.

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