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Myths about buying properties at auction

by | Mar 18, 2022 | Clients

Myth 1: You can just turn up at an auction and buy a property.

Before going to an auction, you should identify the property you want to buy, have a maximum price and review the legal pack, investigating that property thoroughly. For example, you can check the purchase prices that have been paid on similar properties in the area. You can also check the demographics of the area online and for any current or previous planning applications on the property on the local authority website.

Myth 2: Buying properties at auction is harder because you cannot get finance and you need to pay everything on the day of the auction.

Once you have a successful bid you will only need to pay a 10% deposit on the day of the auction, with completion within 4-6 weeks later. We can work with you to get an Agreement in Principle from a lender for the best finance to suit your needs ahead of the auction. This will allow you to bid with peace of mind.

You may want to pay for a valuation to be carried out on the property before the auction to ensure it is suitable for a mortgage and attend the auction with a formal mortgage offer.

There are a variety of finance options available including:

  1. Standard bridging loans – to assist with the purchase
  2. Refurbishment loans – to assist with the purchase and enable light or heavy works depending on the extent of the works
  3. Development loans – when starting with land or a major change of use such as an office block to residential housing.

With standard bridging and refurbishment loans, there is not usually an early redemption charge, but there are with some development loans. You need to take all of this into account to calculate the final repayment sum. Repayment will happen either through the sale of the property or by moving across to a term loan.

Myth 3: If I get a loan to buy a property at auction that is going to hit my cash flow because I’m going to have to pay it back every month.

You can pay back monthly if you want, but there are various facilities available within auction loan types, such as:

  • Retained payments: This means that repayments come out of the advance, so you receive a lower net advance on day one but have no payments to make for the period of the loan.
  • Rolled payments: The repayment amount is added to the balance every month and this total amount is paid by the borrower at the end of the loan term.
  • Service payments: The borrower would make service payments monthly so lenders need to look further into the affordability of the loan to ensure that the borrower can make the monthly payments.