In this article for Financial Reporter, CEO of Connect for Intermediaries Liz Syms outlines how the auction purchase process can run smoothly if a bridging lender
If a borrower comes to you looking to buy a property to renovate or convert, they will be looking for finance for the initial purchase of the property and then for the building works.
Some mortgage lenders will refuse to lend on properties that are uninhabitable, others will lend, but only based on the current value of the house, and will not lend anything further until the project is complete and the property can be re-valued.
And if the borrower is looking to buy a property at auction, this adds more complication. Now becoming an increasingly popular option, buying at auction certainly has its advantages, namely that the buyers can get the property at a competitive price, and start work on the renovations straight away.
And while a traditional lender may offer an agreement in principle, until the client has won the auction, nothing can be done. And when the hammer goes down, the buyer is legally bound to buy the property, things need to happen quickly. The buyer will have to pay the deposit there and then, and then need to be able to provide the remaining funds within less than a month or they will lose their deposit.
Even if there is an agreement in principle with a lender, it is unlikely that the lender will be able to get the finance in place in time. They will need to do a full valuation, they will need bank statements, employment history etc. and all of a sudden – even if the lender is prepared to lend – they can’t get the finance in time to meet the auction’s terms.
In these cases, a bridging loan can offer the perfect solution. If you come to a bridging lender, they will usually accept short form valuation and agree on heads of terms, and then if your client does then win the auction, the bridging lender will be able to get the ball rolling straight away.
If your buyer decides to sell straight after the renovation work, they may not need to get a longer-term finance deal in place – their exit strategy will obviously be to pay the loan back with the proceeds of the sale.
However, if they decide to keep the property, once the bridging loan is in place, you will then have time to put long-term finance in place – whether that is a residential mortgage, a buy-to-let loan or commercial mortgage – to pay off the bridging loan.
Buying at auction can be a stressful and risky process but if you come to a bridging lender in advance to talk about options, the process can run smoothly.