Auction finance explained

Commercial properties such as office buildings, industrial units and retail premises are all available at auction. But having the funds in place to secure a sale can be a challenge – that's where auction finance comes in.

3 July 2019

If you’re buying a commercial property at auction, you'll need to be prepared to pay a 10% deposit on the day, followed by the remaining 90% balance within 28 days.

Such a fast turnaround can be a challenge unless you have a suitable form of finance in place. That’s what auction finance is for: it’s a quick way to acquire the funds you need to buy property at auction.

How does auction finance work?

Auction finance works by arranging the amount to be borrowed ahead of the auction. As the buyer, you’ll begin by deciding what type of property you’re looking for. You’ll then need to find an auction that is selling properties that suit your criteria, before making a shortlist of potential properties to bid on.

The next step is to discuss your plans with a lender who offers property auction finance, which is sometimes also known as auction bridging finance. The lender will need to approve you for finance before they offer you a loan – this could involve numerous checks, such as valuing the property you intend to purchase and checking your credit score. Generally speaking, the more experience you have as a property developer or business person, the greater your chances are of securing this type of finance.

If you’re approved, you’ll be able push ahead with bidding on an auctioned property that matches the agreed criteria. For example, your lender may offer to finance up to 90% of a four-bedroom house that costs between £300,000 and £350,000. In this instance, you’d need to bid on a house that matches this description, and also have a 10% non-refundable deposit (between £30,000 and £35,000 in this example) ready to pay on the day of the auction.

Assuming you’re successful and pay the deposit required on the day of the auction, you’ll have 28 days to transfer the remaining amount to the seller. This is when the lender fulfils their side of the deal, paying the balance as per the terms in your agreement.

Quick fire facts about auction finance

  • It's one of the most popular ways to finance a property bought at auction, particularly for commercial purposes.
  • It provides quicker access to finance than a mortgage, as long as you have already an agreement in place with the lender.
  • The finance is subject to terms and conditions that can be dictated by the lender – these are likely to be more stringent if you’re new to property development or business.
  • It's more expensive than many other types of borrowing.
  • Similar to construction finance, auction finance shouldn’t be viewed as a long-term solution.
  • It requires security to be pledged as collateral. So if you fail to make repayments, your home could be repossessed.

Why can auction finance be useful?

Auction finance provides a simple solution to a traditionally slower property mortgage: it allows you to arrange everything with the lender ahead of time, bid on a property that suits your need, and have them pay 90% of the agreed price.

This can give you time to look for a more affordable long-term form of finance such as a commercial mortgage. Traditional property mortgages can take a while to arrange. This means they’re not always suitable for buying a property (commercial or otherwise) at auction, because you’ll need to pay the remaining balance within 28 days of your winning bid.

The main drawbacks of auction finance include relatively high costs and the need to secure your loan against existing assets, often your private home. While it provides a convenient way to buy property at auction, the tradeoff is higher interest rates and administration fees payable to the lender. For this reason, auction loans should only be considered a short-term solution used to quickly gain the finance needed to buy auction properties. To avoid incurring painful interest rates and fees, most auction buyers look to refinance as quickly as possible once they own the building or land.

Not sure if you want to use auction finance?

If you’re not sold on the idea of auction finance, an unsecured loan such as those offered by iwoca could be a viable alternative. This type of finance offers comparably lower interest rates, without the need to pledge existing assets as collateral for the loan.

Instead, your eligibility will be determined by your track record as a business owner – the better your performance, the more you could borrow. It could be another quick way to fund the expansion of your property development business.

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In summary

Auction finance can be a fast and convenient way to secure the funds for buying a property at auction. However, it isn’t suitable as a long-term finance solution, and other types of loan could provide a better deal.

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Words by Matt Ayres

Matt Ayres is a freelance copywriter based in Cardiff who specialises in creating content for small businesses. He believes that words are essential to connect with your customers and has provided his expertise to companies such as ASOS, Virgin Media and Oxford Mail.

Article updated on: 3 July 2019

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