Don’t go into an auction without having done your research
16th Aug 2022
Purchasing a home at auction is appealing. After all, you might find a good deal.
However, it is very different from the traditional way of buying, and it is often much faster, so it is critical that you understand how the process differs before you make a bid.
Specialist lender Together saw a noticeable rise in investors applying for finance to buy at auction last year. Scott Hendry, director of auction relationships at the lender, has published his top tips for those considering buying in this way.
- Choose the right kind of property
We often find investors buying ‘fixer-upper’ homes at auction to do them up before selling or renting them out. Properties that are in a particularly poor state of repair may be deemed ‘uninhabitable’, for example, if the property lacks a working kitchen or bathroom, has structural problems or has previously been affected by subsidence. However, these types of properties can be picked up for a discount at auction and, if the buyer is willing to put in the effort – and upfront costs – to bring them up to habitable standard, they can make decent profits from selling them or renting them out to tenants.
- Make sure it’s a good investment
For those bidding at auction for buy-to-let properties, it’s critical they consider how to best maximise their rental yields. They should take into consideration factors such as the general area, schools, social amenities and transport links, while being mindful of the future capital growth of their chosen property.
Commonly, holiday lets may also make a good investment, given the boom in staycations over the past few years, particularly during Covid-related lockdowns. The tax rules are more favourable for short-term holiday lets, compared to traditional buy-to-let, and we are seeing a lot of interest in providing finance within this sector from potential investors.
- Conduct your own research
Research is vitally important for anyone buying at auction and their first task should be to read and fully understand the legal pack which comes with each property lot. This contains documents relating to the property and is prepared by the seller’s conveyancer. Investors need to make sure they’ve read the small print, as it’s often in these sections where surprises – such as special conditions of sale, covenants, restrictions and rights of access – are noted. Prospective buyers can request the legal pack in advance and ask their conveyancer to check it out as well.
- Secure your financing
Its essential auction buyers arrange their finance in advance to work out exactly what they can afford to bid, and what it’ll cost. Usually, buyers have 28 days to complete the purchase and pay the balance they owe. However, rapid completions are not unheard-of and may mean they have far less time to get their finances in place. The most commonly-used auction finance is a bridging loan, which lasts up to 12 months. Borrowers only repay the interest each month, and repay the initial sum borrowed (plus any fees) as a lump sum. This can be helpful if they need time to arrange long-term finance further down the road.
Karl Tidman Director at 3mc said: Talk about lender choice in market important as clients that you get advice from brokers that understands the bridging market and choice
“Here’s where a securing a bridging loan against the property for up to 12 months might be useful. This would allow you to complete the work they need to do and exit the short-term loan by selling the property – with investors expecting returns of up to 20% on the most successful renovations.”
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Please note: We can advise/arrange Business Buy to Let (BBTL) and Consumer Buy to Lets (CBTL). Of the two, only Consumer Buy to Lets are regulated by the FCA.