| The article refers to purchasing property at auction, the | | | | as the rental coverage exists) and the interest rate will |
| essential planning and steps required to complete a | | | | be very keen. Unless you were planning on reselling |
| successful property acquisition. Although the general | | | | the property then a buy to let mortgage would be the |
| property market faces testing times auctions are a | | | | ultimate form of loan to be secured on the property so |
| market where deals can and are being done. | | | | by going straight into a buy to let mortgage you avoid |
| These circumstances have led to rapidly shifting | | | | two sets of finance costs, the first finance cost of the |
| criteria by lenders; with funding lines that were | | | | loan used to acquire and the second of the buy to let |
| previously available either being withdrawn or altered | | | | mortgage itself. There are disadvantages of using buy |
| beyond recognition, therefore how can I assist you | | | | to let finance and they are as follows. |
| raising finance? I manage a regional finance business | | | | Speed |
| with access to a panel of over 100 lenders, from high | | | | Although a buy to let mortgage can theoretically be |
| street banks and institutional investors through to | | | | put into place within 4 weeks (the general time scale |
| merchant and private banks, private wealthy individuals, | | | | of an auction purchase being 28 days), due to the |
| groups and venture capitalists. | | | | underwriting process generally taking longer in the |
| Whether your a seasoned property investor or a | | | | current economic climate, there are no guarantees that |
| novice, there is no disputing property auctions are | | | | the mortgage will be in place before the 28 days are |
| where extraordinary bargains are to be had at for | | | | up and you could therefore lose your deposit. |
| those with a keen eye for a deal. But how do you | | | | Mortgageability |
| obtain finance in a market where LTVs ratios are | | | | A buy to let lender will need the property to be in a |
| falling without having to employ substantial amounts of | | | | mortgageable state. If the property is damaged in any |
| your personal money. | | | | way, without electrics, plumbing or even a kitchen |
| So why use an auction? There are many reasons | | | | bathroom the lender will not be able to secure a |
| why people consider buying or selling at auction; they | | | | mortgage against the property. |
| may want to move quickly, they may be looking for a | | | | Retention |
| plot of land for development, the property may involve | | | | Retention is a watered down version of the previous |
| repossession, or simply that they want a quick | | | | disadvantage. We are seeing lenders' increasingly |
| purchase without the risk of gazumping. Also many | | | | retaining a proportion of the mortgage until the |
| buy to let investors consider auctions because of the | | | | borrower meets certain pre-conditions. If for example |
| variety of properties on display at any one time and by | | | | the property is mortgageable but in a very poor state |
| nature there a good place to bag a bargain. | | | | the lender may hold back for example £20,000 |
| With properties that are re-possessed the lender who | | | | until the borrower has brought the property up to an |
| has taken ownership of the property owes a burden | | | | "acceptable" standard. This may make completion |
| of care "an equity of redemption" to the client who | | | | impossible as the whole lend may be needed to make |
| they initially lent monies to. This means in practice that | | | | up the full balance of funds. |
| a lender who repossesses will generally offer these | | | | LTV |
| types of property in an auction and so they remain | | | | A buy to let lender on a purchase transaction will lend |
| places where under value properties can be acquired. | | | | as a percentage of the valuation or purchase price |
| Buying or selling properties at auction can have a | | | | whichever is the lower. |
| number of advantages for both the buyer and seller. | | | | Rental Yield |
| Most of the delays associated with property | | | | Even if a valuation comes in on target allowing a buy |
| transactions are eliminated, the auction and completion | | | | to let provider to lend the percentage required if the |
| dates are fixed, and the sale contract becomes binding | | | | rental yield comes in lower than the minimum required |
| upon the fall of the gavel. | | | | for that lend then this will reduce the loan amount |
| This following tips section of this article will focus on | | | | available. If for example a £100,000 property has |
| the property transaction primarily from the buyers | | | | a £75,000 lend offered if the rental yield comes |
| perspective with an emphasis on the lenders that | | | | in over £400 and the rent comes in at |
| operate in this market. | | | | £350 then the loan amount offered would drop |
| Tips | | | | to £65,000. |
| Inspect the property and do as much research as | | | | Bridging Loan |
| possible about the property and the neighbourhood. | | | | Due to these previous disadvantages of applying for a |
| There are house price sites on the web to find out | | | | buy to let mortgage at acquisition many property |
| how much similar properties have sold for. | | | | investors will seek to use bridging finance to complete |
| Ensure you read all written material provided by the | | | | the purchase and then use buy to let mortgages to |
| Auctioneer, the Legal Pack and the HIP. It is important | | | | refinance out of the bridging loan. The key advantages |
| to fully understand the contents and the terms and | | | | to a bridging loan is that as an asset based form of |
| conditions of the auction. | | | | finance it is quicker; there are less affordability hoops |
| Ensure sufficient funds are available for the deposit | | | | that an applicant has to go through to be judged |
| which will need to be paid at the auction i.e. often this is | | | | applicable and in many instances the loan becomes in |
| 10% of the sale price but you should check what the | | | | essence "self-cert." A bridging loan can also be loaned |
| deposit will be before the auction. Also check which | | | | as a percentage of the Open Market Value of the |
| methods of payment are acceptable (as some | | | | property so if you have bought the property under |
| methods of payment may not be acceptable such as | | | | market value you can potentially borrow a higher |
| cash or credit cards). | | | | percentage of the purchase price than with a buy to |
| Most Property Auction Houses do not advertise to the | | | | let mortgage. Be warned however, that the days of |
| public as they are still aimed at professional purchasers | | | | 100% lending against the acquisition property are more |
| so you will need to make enquiries on the Web or at | | | | difficult to arrange, the lender will want to see at least |
| your local estate agent to determine when and where | | | | some client contribution even with a strong valuation |
| a property auction that might include properties of | | | | report. |
| interest will take place. | | | | Certain bridging loans will allow you to use equity in a |
| Be prepared to move fast. Property Auctions take | | | | secondary property to essentially top-up the loan to |
| place only three to four weeks after the property | | | | 100% of the purchase price with a first charge on the |
| auction catalogue is first issued. If you are | | | | property being acquired and a first or second charge |
| subsequently successful at auction you will then have | | | | on the additional security. |
| usually between 14-28 days only to complete. A ten | | | | Finally, a bridging lender will not be put off by the |
| day default period will follow this where the purchaser | | | | condition of a property in the same way that a buy to |
| will be charged interest and can in the worst case | | | | let lender would be. So long as the asset has an open |
| scenarios be used to extend the 14-28 day period. | | | | market value, despite its condition then generally a |
| Check the Auction guide small print to see what | | | | bridging loan can be arranged as a percentage of that |
| penalties this will incur. | | | | value. Some funding lines even allow you to draw |
| On the auction day an intention to bid will need to be | | | | down further monies against an increase in the |
| registered (either prior to the auction or in the auction | | | | valuation of the property to help with the funding of |
| room). If the bid is successful the sales memorandum | | | | any development works or a release of capital when |
| will need to be signed and the deposit paid there and | | | | the property is refurbished - allowing the developer to |
| then. | | | | use these released monies to move onto their next |
| The buyer will often be responsible for the insurance | | | | project. |
| of the property from the moment the gavel falls. The | | | | As with buy to let mortgages there may be |
| date of completion when the balance of purchase | | | | disadvantages when utilising bridging finance and the |
| price will be paid and possession will be taken will be | | | | main ones are as follows. |
| stated in the conditions of sale. | | | | Expense |
| If a property being sold does not make it's "reserve | | | | For the speed and relatively self-cert nature of the |
| price" then although this is generally not disclosed the | | | | bridging loan you will pay a premium on the monies |
| auctioneer will state that the current bids are close to | | | | borrowed with rates of between 1-2% per month. In |
| the reserve price. A subsequent conversation after | | | | addition to these rates there will be additional valuation |
| the auction may allow you to purchase the property | | | | fees, legal fees, set-up costs and potentially exit fees. |
| below the reserve price if the vendor is in agreement. | | | | Unless the applicant is borrowing at a very low LTV it |
| This final "tip" is worth looking at in some detail; the | | | | is rare in the current climate for these fees to be |
| level of due diligence a bidder should perform prior to | | | | "rolled-up" into the loan so the set-up costs will be |
| the auction itself. Historically, if a buyer had 20-25% of | | | | deducted from the loan on draw down and then the |
| the purchase price in their back pocket then they were | | | | loan will need servicing whilst outstanding. |
| relatively safe going into the auction, making a winning | | | | Exit strategy |
| bid and then worrying about arranging the rest of the | | | | A relatively recent addition to buy to let mortgage |
| monies at that point. | | | | provider's criteria is that they will require a property to |
| These days with funding lines restricted it is worthwhile | | | | be held for a minimum period of 6 months before |
| making sure that funds are going to be available | | | | allowing an applicant to use their loan to pay back the |
| beforehand. Unfortunately, without a full valuation | | | | bridging loan (there are new mortgage products |
| report it is difficult for either an investment mortgage | | | | available that don't require this six month rule). At that |
| provider or a bridging lender to be able to give the | | | | point the buy to let loan can be borrowed as a |
| applicant a definitive decision as to the level of funds | | | | percentage of the Open Market Value but the |
| they can make available, or the rates of those funds. | | | | applicant will have had to pay 6 months of bridging |
| An agreement in principle can be indicated but this will | | | | finance rates by that point. |
| always be subject to the legal due diligence and the | | | | Retained Interest |
| valuation report. Although the legal due diligence cannot | | | | As bridging lenders are aware of this refinance |
| be arranged prior to an applicants "winning bid" one | | | | precondition, many lenders in order to guarantee that |
| variable that can be eliminated is the valuation report | | | | they will have their loan covered for the 6-month |
| and therefore preparation boils down to whether or | | | | period will stipulate that 6 months interest is retained at |
| not the applicant should cover the expense of a | | | | source. That means on a gross loan that initially looked |
| valuation report even before they have become a | | | | quite good at 65% of LTV, the net loan that ultimately |
| successful bidder. | | | | ends up in the borrower's hands can be as low as |
| If the applicant is looking at a number of properties | | | | 55% LTV even though of course this now results in |
| then this can become an expensive exercise, but the | | | | the borrower not having to service the loan over its |
| ability of a valuation report to highlight potential lending | | | | term. There are advantages and disadvantages to |
| problems, and to get an independent valuation not | | | | whichever form of finance is being used to acquire a |
| solely based on the purchase price - makes in our | | | | property at auction and these relative merits change |
| opinion the purchase of a valuation report pre-auction | | | | as the lending criteria themselves change. |
| invaluable. | | | | Certain aspects of the depressed property market |
| There has been a change in the market with regards | | | | currently being experienced make auction purchases |
| the acceptability of taking existing valuation reports and | | | | more attractive than they were, however these same |
| having them retyped to the ultimate lender - for | | | | conditions affect the availability of the types of funding |
| example, the largest company of surveyors in the | | | | lines that remain. Always perform minimal homework |
| country Connells no longer accept instructions for | | | | even prior to approaching a broker/lender with some |
| retypes, an instruction now has to be to a specific | | | | knowledge on the security and what you hope to do |
| lender only. Likewise a lender will almost always want | | | | with it, the broker/lender can then fill in the gaps in your |
| to instruct the valuation themselves. This may mean | | | | knowledge with what products are still available and |
| that even if a valuation report has been prepared prior | | | | what criteria may have changed in your favour. |
| to the auction the lender may require a second | | | | There is nothing that an underwriter likes better (save |
| valuation report with subsequent expense to the client. | | | | apart from a concrete exit strategy) than actually |
| The need for a second report can be minimised by | | | | seeing a current valuation report on the property that |
| using valuers who are generally acceptable on most | | | | they are being asked to give an agreement in principle |
| panels but there remain no guarantees. However, the | | | | on for a lending decision. The valuation report if |
| initial valuation report should enable an applicant to pin | | | | supplied by a surveyor who is also on their panel so |
| down the lender to an exact loan amount bearing in | | | | much the better. |
| mind no subsequent issues arise during the legal | | | | For the sake of losing a reasonable sum of money, |
| conveyancing and any subsequent report comes in at | | | | that this valuation report may cost the information it |
| the same value. | | | | provides may save you thousands in the long run. |
| Funding lines | | | | In nearly every circumstance I have found ways to |
| There are two lines of funding that can be used to | | | | assist in and am happy to speak with you about |
| complete on an auction property purchase, a | | | | financing your next or even your first auction property |
| mortgage (either residential or investment) or a bridging | | | | purchase. My colleagues can assist you to structure |
| loan. Each has their own specific advantages and | | | | your portfolio in a tax efficient manner, minimising |
| disadvantages as follows. | | | | capital gains and other taxations. Thank you for |
| Mortgages | | | | reading this property guide. I hope the information |
| Generally a purchaser of a property at auction will not | | | | contained within will prove to be profitable for you. I |
| be using the property as their main residence so this | | | | urge you to take action and get started on creating |
| section will concentrate on investment or buy to let | | | | your own property portfolio plan and consider your |
| mortgages. | | | | next or first auction purchase. The following words |
| The main advantages when being used as a | | | | may act as inspiration, and help you to reach for the |
| purchasing form of finance is that you can generally | | | | stars, good luck. |
| get a loan of up to 75% of the purchase price (so long | | | | |