What you need to know about financing a client’s auction purchase
A checklist for meeting the needs of auction finance clients (including the lesser-known special conditions of sale)
Certainty of purchase, transparency and speed, plus the opportunity to find properties being offered below market value attracts many to the auction room. Subsequently there is high demand for securing prompt access to finance before the gavel falls. For intermediaries the challenge is to scour a specialist lending market quickly and find the best deal.
Below is a high-level auction finance checklist to support and accelerate the search for your client’s funding.
Get a competitive deal
The reality is that time constraints preclude the use of high street lenders unless buyers have an existing line of credit. This opens the field to the competitive bridging market, where lenders are keen to tailor their loans to auction purchaser needs. The challenge for the intermediary is to know where those offers are. Of course, we’re biased, but we think we’re prepared to go further than most lenders on LTV, discounts and price. For our custom-made auction finance product . .
- We pay half the valuation fee
- And our rates are as low as 0.64% per month
Get a great LTV offer: 90% of purchase price or 75% of open market value
Bidders at auction are often successful in securing a purchase well below its market value. In such cases, we can generate the client 90% of the purchase price, providing our loan does not exceed 75% of the property’s market value (we work from the lower of the two).
To put this in context. . .
Purchase Price – £250,000
Market Value – £350,000
A traditional funder will typically work from the purchase price, offering the client up to 75%. £250,000 X 75% = £187,500
Purchase Price – £250,000
Market Value – £350,000
LendInvest can lend 90% of the purchase price, providing the loan does not exceed 75% of the market value
£250,000 X 90% = £225,000.
Our offer allows the client to generate an additional £37,500, leaving them more capital available to inject into other projects.
Be certain on the speed of the transaction
When your client makes that winning final bid in the auction room they have entered into a binding contract. They will generally have to pay a deposit of around 10% of the purchase price within 24 hours of the auction concluding. And will usually need to complete the purchase within 20 working days. For intermediaries this requires two questions to be answered.
- What is the track record of the lender in terms of speed?
- How efficient is the team behind the lending?
- We assign a fast-track team to all auction finance enquiries to ensure fast ‘decisions in principle’, which enable intermediaries and their clients to make arrangements in advance of the bid.
- This fast-track team is also responsible for high speed completions
- Below is an example of a typical time-table for our bridging loans:
Friday – initial enquiry discussed
Monday – completed application form received
Wednesday – valuation inspection
Friday – completion
Watch out for special conditions of sale
Special conditions of sale can throw a spanner in the works when it comes to your client’s exit strategy, bringing up unexpected challenges that could have been prevented. This can be avoided by checking your client has read through the special conditions of sale and covenants.
The special conditions of sale to look out for are
- a shorter completion period
- an additional sellers premium and/ or overage clauses
With covenants, look out for
- non development or split rights of way
- retirement flat age restrictions
If buying leasehold look for
- information regarding the length of lease remaining
- service charges and the sinking fund
It’s always a good idea for your client to get a solicitor to confirm their views and to look at access and the local authority planning portal.
- Before your client secures finance it’s important they understand details that are easily overlooked. . .
Support a client to buy before auction
On average 7% of properties sell prior to auction. For these buyers it is essential to have finances in place at this point; if the vendor accepts the offer, contracts will be exchanged immediately, they will pay a 10% deposit, paying the remaining 90% within 20 working days.
Accelerate the search for finance with pre-qualified lots
LendInvest has a partnership with auction site Lot11, where we pre-qualify certain lots that we are happy to lend against in upcoming Lot11 auctions. These lots are signposted with our branding.
This is aimed at supporting intermediaries to place clients. So long as the prospective buyer has a good credit profile, this pre-qualification gives intermediaries a benchmark against which to gauge whether they can find a better offer for their client.
To speak to one of our BDMs about auction finance call us on 020 7118 1133