Bridging Loans for Auction Properties: A Strategic Approach to Winning Bids

– Introduction to Auction Properties
– What Is a Bridging Loan?
– Why Bridging Loans Are Ideal for Auction Properties
– How to Use Bridging Loans Effectively in Auction Purchases
– Strategies for Success When Using Bridging Loans
– Case Study: Renovation of a Distressed Property
– 3 Common Pitfalls to Avoid
– Conclusion: Is a Bridging Loan Right for Your Auction Property Purchase?

Purchasing a property at auction can be an exciting opportunity for investors and buyers looking for a quick and profitable opportunity. However, securing finance swiftly enough to meet the strict auction deadlines can be a challenge. Bridging loans, often referred to as auction finance, provide a useful tool for buyers to secure auction properties without the long wait of traditional mortgages. In this blog, we will explore how bridging loans can be effectively used in auction property purchases, along with tips and strategies for maximising their potential.

Why Buy at Auction?

Auction properties present an attractive opportunity for buyers who are seeking investment properties, renovation projects, or quick acquisitions. These properties can usually be purchased below market value, especially when the seller is motivated to sell quickly.

The Challenges of Financing Auction Purchases

The biggest hurdle in purchasing at auction is the speed at which you must complete the transaction. Once you’ve won a bid, the auction house typically requires a 10% deposit immediately and the full purchase amount within 28 days. Traditional mortgages may not be approved within that short window, leaving buyers in need of alternative financing solutions like bridging loans.

A bridging loan is a form of short-term lending, secured against a property. Bridging loans are used to bridge the gap between buying a property and securing longer-term finance, or selling another property. They are designed to provide fast access to funds, usually within days, rather than the weeks or months associated with standard mortgages.

How Bridging Loans Differ from Traditional Mortgages

• Quick Access to Funds: Bridging loans are typically approved much faster than traditional mortgages. Bridging loan funds have been paid out by BIG Property Finance in a matter of days, whilst a high street lender would normally finalise a mortgage in 4-6 weeks at the fastest, as part of a standard property transaction.
• Short-Term Solution: While mortgages are long-term loans spanning 30-40 years, bridging loans are designed for terms of up to 12-24 months.
• Portfolio Funding: Bridging loans can be secured against multiple properties at once, offering more flexibility. This can allow an investor to take advantage of equity tied up across their property portfolio and release cash from several lower value properties.

1. Quick Approval and Funding

Auction purchases are time-sensitive, requiring fast access to funds. Bridging loans can often be approved in a matter of days, ensuring you have the funds to complete the sale within the auction’s timeframe, normally 28 days. Bridging loans allow you to act swiftly, ensuring you don’t miss out on a good deal due to financing delays.

2. No Chain, Giving You a Competitive Edge

Sellers favour buyers who can complete transactions quickly. As bridging loans eliminate the need for a property chain, you’ll be a more attractive buyer.

3. Flexible Loan Terms

Bridging loans are flexible, meaning you can secure finance even if the property is in a state that wouldn’t qualify for a traditional mortgage, such as a property in need of immediate renovation or refurbishment.

4. Ability to Buy Properties Under Market Value

Auction properties are often sold at a discount, and bridging loans allow you to take advantage of these opportunities. The quick availability of funds makes it easier to act fast and capitalise on below-market prices. In some instances you may also, still be able to borrow against the market value, and not the purchase price.

Step 1: Pre-Approval for Bridging Finance

Before attending the auction, seek pre-approval for a bridging loan. This ensures that once you win the bid, you’ll have the financing in place to complete the purchase. This can also guide you in setting your bidding limit. Some lenders will provide indicative terms only, before an offer has been accepted, however utilising the expertise of a financial advisor or broker will allow you to confirm your eligibility with key providers. You will also need to factor in the cost of finance and any associated fees, into the overall profitability of your property investment.

Step 2: Researching Auction Properties

Do your homework before the auction. Know the properties that interest you, understand their value, and identify any renovation or legal issues that could affect their price or resale value. Review the auction pack in detail. 

Step 3: Making an Informed Bid

With your bridging finance ready and research done, bid confidently within your budget, knowing you can complete the purchase quickly. Don’t be tempted to pay above this budget, as if you purchase a property at above its value, you are unlikely to be able to lend against the full purchase price.

Step 4: Securing the Loan and Completing the Purchase

Once you’ve won the auction, work with your lender/broker to finalise the bridging loan, ensuring all legal checks and property valuations are completed efficiently. You can normally influence the speed of completion by promptly completing any application documents and continually chasing your solicitors/lender for updates.

Tip 1: Understand the Auction Process

Ensure you’re familiar with how the auction house operates. Some houses require upfront registration, and there may be specific rules on bidding and deposits.

Tip 2: Know Your Financing Limits

Always have a clear understanding of your borrowing capacity and stick to it during the auction. Factor in interest rates and fees when calculating your maximum bid.

Tip 3: Have a Clear Exit Strategy

Whether you’re planning to sell the property after a quick flip or refinance with a mortgage, have a clear plan for repaying the bridging loan.

Tip 4: Work with Specialist Lenders/Brokers

Choose a lender with experience in auction financing. This ensures the process goes smoothly and that you can meet the auction house’s tight deadlines.

Tip 5: Time is of the Essence

Prepare all documents, legal arrangements, and valuations before the auction to ensure a smooth transition after a successful bid.

We have recently provided a bridging loan for a landlord to purchase a distressed property at auction, renovate it quickly, and refinance onto a buy-to-let mortgage. = The money facilitated the purchase of a residential property, in Birmingham, at auction. No formal valuation was obtained due to a tight time frame and low LTV (sub 50%.). The property was to subsequently be refinanced following renovation works.

The outcome was a rapid property acquisition and increased property value post-renovation.

1. Overbidding Beyond Your Financing Capacity

Keep your bids within the limits of your pre-approved financing/market research. Otherwise you may have contractually committed to a purchase you are unable to afford.

2. Not Considering Loan Costs and Fees

Be aware of the interest rates and associated costs of the bridging loan. Common fees include an arrangement fee, broker fees, legal costs, valuation fees, admin fees & exit fees.

3. Lack of Due Diligence

Thoroughly research the property and understand any potential legal or structural issues before bidding. You don’t want to regret your investment by missing something crucial that could derail your plans.

Bridging loans offer an excellent solution for buyers looking to secure properties quickly at auction. However, they must be used strategically to ensure success. By understanding the risks and benefits, working with the right lenders, and preparing adequately, you can maximize the potential of bridging loans and achieve auction success.

At BIG we want to provide all our clients with a positive experience and quality service. Therefore, we like to work with investors and experienced individuals who fully understand the risks and responsibilities of obtaining a bridging loan. We are always happy to provide further information – contact us today on 121 348 7830 or at info@bigpropertyfinance.co.uk