10 Jul 2018 By WengYee Loke
When it comes to buying property at auction, one thing that you absolutely must consider is finance.
With a set exchange/completion date, it is important to have your finances in order. Auctions are all about certainty and efficiency so any delays would not play well. The rise of online auctions has however given buyers more choice with the conditional auction method (also known as the modern method).
Here’s a recap of how the finances flow using the different auction methods.
Traditional auctions see exchange happening immediately at the end of the auction period. When the hammer falls (or the timer reaches zero), the winning bidder enters into a legally binding contract. They usually then have 28 days to complete on the property.
Example: You win the property for £500,000 today on 22 May 2018. 10% of the purchase price is due at time of exchange - in a ballroom auction. For an online auction such as ours, we charge the buyer £5,000 when the timer reaches zero. That is made up for the buyer fee at £2,400 and £2,600 goes towards the purchase price. You then have 5 working days to transfer the remainder of the 10% deposit - £47,400 (£50,000-£2,600). And the rest is due within 28 days from date of exchange - 19 June 2018. Beware! If you do not complete in that time, the seller is legally entitled to pursue you through the legal system for damages.
Many properties that are sold through the traditional auction method may be termed unmortgageable so options for finance are more limited.
With this new method of auction, the seller and the winning bidder enter into a reservation agreement at the end of the auction period. When the timer reaches zero, a non-refundable reservation fee is paid. Giving the winning buyer 20 working days to exchange contracts and a further 10 working days to complete (unless otherwise agreed). That’s just 30 working days to completion.
Example: You win the property for £500,000 today on 22 May 2018. There is a reservation fee to be paid immediately. Date of exchange has been set for 20 working days later which is 11 June 2018 where 10% of the sale price is needed. You then have till 21 June 2018 to complete and transfer the rest of the money.
The most straightforward option is to be a cash buyer. If you don’t need financing to buy the property then you are a cash buyer. Whether that is from an equity release from your existing portfolio, sale of another property or even an inheritance.
A bridging loan does just what the name says - it ‘bridges’ the gap. They are short term loans lasting anywhere from 3 months to a year. They are quick to secure, so they serve auction buyers well who need a bit more time to secure long term finance. You could take out a bridging loan while applying for a high street lender mortgage.
Property developers also use them as a bridge to sale. So if you buy a property at auction that you intend on renovating and selling on in a short space of time, bridging finance can work well.
Can you buy property at auction with a mortgage? Yes, through the conditional auction method. The extra time should give you more time to secure one, and remember you need to exchange within 20 working days - not complete. This means that you need to pay 10% within 20 working days, with the rest due on completion. As a worst case scenario, if you failed to hit the deadline or can’t raise the mortgage, you do not have to exchange contracts. That way you won’t have to legally complete on the property, although bear in mind that you risk losing the reservation fee in that scenario.
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