October 26, 2016
Property auctions have long been seen as a great place to pick up a great investment.
But with any purchasing decision, especially one of high value - you should be well prepared. So what do you need to know if you want to get involved in property auctions?
There are a few things you can do to get your finances ready before the event.
Firstly, it’s worth checking the auction catalogue, which can be available up to a month before the day. You can also pay a visit to the properties to check out what kind of work they might need and what this will cost you. This will let you see what’s on offer within your budget.
You’ll also need a deposit – assume around 10% – that will often need to be paid on the day. Remember, most auction firms will expect you to complete the purchase within 28 days.
It’s worth at this stage speaking with your lenders to organise a provisional acceptance of a loan. This could be in the form of a mortgage in principle, whereby the bank performs a basic check on your income and the value of the property and provides a note saying that – in principle – they would be willing to lend the amount needed to you.
At the auction – with your mortgage in principle in hand and your targets picked – try not to go over budget.
Your deposit and potential mortgage value should equal the upper end of your budget. If you go significantly over this amount your lender might not provide the extra cash and you’ll be left with a funding gap.
In this case, you could use a bridging loan to secure the property and then go back to the lender and agree a new deal based on the higher value.
But once you’ve bid for and won the perfect property, you’ll next need to organise your payment. With 28 days to get payment across, a high street mortgage probably won’t be the first port of call if you’ve not already spoken with them, as with the stricter application processes these can take a lot longer.
A bridging loan is the perfect stop gap. You can secure the loan in a matter of days, pay of the remaining balance you owe and then have all the time you need to organise another form of long term financing.
If you’re not going to be able to attend the auction, you might want to bid online.
This is where your deposit comes in handy, as many auction houses will require you to send a cheque for 10% of the maximum value you’re willing to bid for a property.
If you go into a property auction knowing exactly what you want, what you’re willing to pay and have agreed a high street mortgage in principle, in theory you could get everything organised within the 28-day deadline.
But let’s not kid ourselves, in reality things don’t always go as smoothly as that.