One of the great thing about auctions for seller is that the process is over and done with very quickly. But for buyers, this means there's not much time to work with if you win an auction property.
We know mortgages often take a while to arrange, so it begs the question: Can you get a mortgage on an auction property? Or are property auctions cash buyers only?
You don't need to be a cash buyer to purchase a property at auction. You can use specialist auction finance, or a bridging loan instead. You can even get a normal mortgage on an auction property, however this comes with certain risks you need to be aware of heading in.
Let's run through some of the things to be aware of if you're going to try and buy a property at auction without cash.
1. Buying at auction with a normal mortgage
If you're going to try this you certainly need to get a mortgage agreement in principle before the auction. But even then, you're still taking on a few risks.
1.1. Will the lender come through in time?
Let's be honest, mortgage lenders aren't always the fastest. When you buy from auction there's a set deadline you need to complete by (it's usually 4 weeks). If you miss the deadline, you'll be served a legal notice (called a Notice to Complete), which extends it by two weeks.
If you miss this deadline and the seller decides not to extend it further, you'll lose your deposit (which is typically 10% of the purchase price!)
It's a heavy heavy penalty... Would you gamble that amount of money on a mortgage lender coming through for you in time?
Personally, I probably wouldn't. (There are more suitable options anyway - more on this below).
1.2. What if the lender decides not to lend?
The other issue with mortgages is that they aren't guaranteed. You don't know for sure that you'll actually secure the mortgage until the very last minute when the mortgage offer finally comes through.
Note that even if you get a Mortgage Agreement in Principle beforehand, this doesn't guarantee you a mortgage.
This is for three reasons:
- Financial checks. The checks a lender does to give you an AIP aren't the same as the checks they do during a full mortgage application. They'll be much more in-depth, so even if you secure an AIP it doesn't guarantee you'll pass the second round of finance checks.
- Property survey. Remember, the lender doesn't just need to get comfortable with lending to you. They need to get comfortable lending on the property. This will include a property survey. If issues are uncovered here, the mortgage is likely to be denied.
- Legal checks. If your solicitor uncovers any legal complications in the conveyancing, they're obligated to report this to the lender. If the lender isn't totally comfortable with them then the mortgage will be denied.
1.3. "Problem properties" will stop your mortgage
Although these are all serious concerns, it's the 2nd point there that's really worth emphasising (the point about surveys).
Remember that some of the types of properties best suited to sale by auction are properties with some kind of issue - also known as "problem properties". We're talking about issues such as:
Auctions attract more than their fair of these types of properties, so the chance of something like this coming up on a survey isn't exactly remote.
1.4. Is buying at auction with a normal mortgage a good idea?
As you can see, I'm pretty down on the idea of buying an auction property with a normal mortgage.
There's just too much that's out of your hands. You aren't in control of the timeframes - which is a big enough risk by itself. But what if the lender gets funny about your income or credit record or current borrowing, and doesn't agree to lend?
Or what if the mortgage survey identifies issues? Even if you got a survey before bidding, not all surveyors agree. We've had instances where one mortgage surveyor believes a house is fine, and another starts picking holes in it and causing problems with the mortgage. (Surveyors are very cautious people after all).
Trying to buy at auction with a conventional mortgage is just a risky strategy.
1.5. Getting a normal mortgage in a Modern/Conditional Auction
If the property you're looking at is being sold by Modern Method of Auction (MMoA) rather than by traditional auction, you'll probably have slightly more time. This is because Modern Auctions often allow more time to complete (typically 8 weeks after the auction rather than 4 weeks).
It's still risky though, for all the other reasons we've outlined above.
2. Buying at auction with Auction Finance/Bridging Finance
If you aren't a cash buyer, and if you're not confident that a normal mortgage is the best option either, what's your next best choice?
Auction finance (which is essentially just another name for bridging finance) was designed specifically with auctions in mind. This means two main things: Auction finance is faster, and the requirements are less stringent.
2.1. Auction finance is faster than a normal mortgage
Auction finance basically exists to solve the "time" problem that normal mortgages have.
This means that when you go to a lender for auction finance or bridging loans, you'll have a totally different level of customer service. There'll be a different level of urgency too, as the lender knows they're only going to win your business if they can move fast.
2.2. Bridging lenders are more comfortable with a bit of risk
The lenders providing auction finance/bridging loans also know that auction properties aren't always straight-forward. They may have a laundry-list of issues, or it might be a big renovation project.
Normal mortgage lenders aren't comfortable taking on the risk associated with these types of properties, but it's where auction finance providers make their money.
So if your property has some legal issues, or if the building itself has problems, they may still be happy to lend.
We still recommend getting a survey before bidding, and letting the lender know any issues you're aware of beforehand. (Different lenders have different risk appetites, so make sure you know how they'll react to "problem properties" going in).
2.3. Downsides with auction finance
So auction finance is faster, and you can secure it on properties that otherwise wouldn't be mortgageable.
Although this type of finance has its benefits, it has its downsides too.
Here are some to consider:
- Risky. The lender will likely want personal guarantees. If the deal goes bad, you'll be personally accountable for any losses (even if you buy as a limited company).
- Expensive. Auction finance has higher interest rates, and usually higher arrangement fees and exit costs too.
- Short-term. Auction finance usually comes with a maximum term of 6-12 months. So you really need to know your exit plan.
- Deadlines. You'll face steep penalties if you miss repayment or redemption deadlines (we've seen penalties as high as 5% of the total loan if you go over the maximum term).
- Dodgy industry. Bridging loans are a form of unregulated lending. This means cut-throat practices can creep in. (Since cut-throat practices are generally profitable these types of lenders can grow to a serious size too). I generally recommend staying with the bigger players. Even then, have a solicitor check the terms closely and check reviews thoroughly before engaging.
2.4. Should you get auction finance?
Auction finance can be a fantastic tool to help make deals happen. This makes you money - so auction finance can be great.
I've taken out over 70 bridging loans in my property buying company, and never had a problem. (It's been unbelievable expensive, but it's enabled us to generate profit that we otherwise couldn't have).
Risk vs Reward
Overall, it's a risk vs reward calculation you need to make.
Do more research, be aware of the risks, and decide if you're in a position to take auction finance on.
Research the lender thoroughly, and have a solicitor review the terms before moving forward.
Make sure you have the cash available to service the interest payments too, and make sure you've got a clear exit strategy. (That may be refinancing the property after a refurb, or selling it altogether).
We're going to have more in-depth guides, and even lender comparisons, added to the site soon.
You don't need to be a cash buyer to buy at auction.
You can buy with a normal mortgage if you want to. Personally, I feel this is really risky though:
- Mortgages can take a long time to get in place,
- The lender may decide not to lender for a variety of reasons. (For example, your own finances, or due to the property itself, or the legals associated with it).
If you try and buy an auction property with a mortgage and they don't come through, you'll lose your 10% deposit. It's just not worth the risk considering the range of factors that you can't control.
Auction finance (a.k.a. bridging finance) is an option.
These lenders have more flexible criteria, so you'll be able to get auction finance on properties a normal mortgage lender wouldn't touch.
They can be arranged at short notice too, which fits the auction timeframes.
They can be expensive though, and come with their own set of risks and challenges. Investigate these before deciding whether or not to proceed with one.
By Matthew Cooper, Co-Founder of Home Selling Expert