Financing the growing demand for auction purchases
Bridging finance is the perfect solution for funding auction purchases, so what do investors need to know?
Recent research from Moverly has shown that the number of properties coming to auction in the UK has risen by 11.3% in the past year, up from 13,854 lots in 2021/22 to 15,424 in 2022/23. While the average price of an auction property has declined by -1.8% year on year to £190,871, there was still a £2.9 billion worth of residential property sold at auction in 2022/23.
It’s therefore clear that property investors and buy-to-let landlords see auctions as a golden opportunity for them to increase their portfolios, while vendors are now increasingly leaning towards auctions to offload their properties. The reason is simple: it offers the certainty of closure in a short timeframe. When the traditional property market can be fickle, with sales falling through at the last moment or negotiations dragging on, an auction provides both buyers and sellers with clarity and speed. The auction dynamics often lead to properties being sold at their true market value or even snagging a below-market-value deal.
A key advantage of an auction house is its significant reach. Prior to the auction, the house circulates a comprehensive brochure that contains details of all available lots. This brochure, showcasing photos and particulars, is disseminated widely, catching the attention of property investors and buy-to-let landlords in the region and beyond. In essence, as an investor, you’re not merely stumbling upon a property; you are presented with a catalogue of opportunities.
To ensure that only genuine bidders are in the fray, auction houses mandate bidders to register, confirm their credibility, and demonstrate their funding. Additionally, winning bidders are obliged to deposit a significant non-refundable amount. This ensures a level of commitment and assurance for the vendors, leading to a smooth transaction.
One of the standout benefits of buying at auction is the swift completion. Contracts are typically settled within 28 days post-auction, a stark contrast to traditional property sales, which can drag on for months. This is particularly advantageous for investors, allowing them to get the property to work, be it for rentals or renovations, almost immediately.
But how does one ensure the liquidity to capitalise on these auction opportunities? Traditional mortgage financing is impractical given that full payment is typically required within 28 days of the auction's conclusion. This is where bridging finance comes into play. Bridging finance provides a short-term loan, perfect for the brief period between winning a bid and the final contract settlement. It ensures the investor has the necessary funds on hand without resorting to long-term financial commitments.
Bridging finance is usually the first financing option investors should consider when they spot a property they want to quickly purchase, as is often the case with auctions. This financing method allows not only for rapid property acquisition but also for any necessary renovations.
A number of lenders market a specific auction finance product, which is essentially a bridging loan specifically structured to accommodate the strict timelines associated with auctions. In addition, auction finance is particularly useful for the purchase of properties deemed unmortgageable or uninhabitable.
The combined allure of property auctions and the utility of bridging finance makes 2023 a significant year for property investors. Auctions, with their transparency, speed, and competitive nature, paired with the availability of quick finance options, offer a robust strategy for anyone looking to bolster their property portfolio. Investors would be well-advised to not overlook these opportunities.
Constantinos Savvides, Head of Underwriting at London Credit