Auction Bridging Finance

Joining us on this episode of the Bridging Finance podcast is Scott West from Propertyze to talk us through auction bridging finance. Welcome back, Scott. How are you today? I'm fantastic. Thank you very much. How are you? Good. I'm glad to hear that. And yes, all good too. Thank you. So let's get straight to these questions then. To begin with, what is auction bridging finance? Auction finance is bridging finance. A lot of people will term it. You often hear people saying auction finance, they just mean bridging finance. But when it comes down to really, the differentiating factor is your lender choice. With auction finance, you are almost certainly limited to 28 days from the day of purchase, from the day of the auction, 28 days to complete.

There are exceptions to that. Some will give you slightly longer, but most have 28 days to complete. So you need a bridging lender that can turn around that quickly. So we tend to have, there are a bunch of lenders that work much faster than others, everything else being equal. We tend to go for those lenders if there's no other issues with property, credit or any other kind of mitigating factors. So when it comes down to how to get the bridging finance, same as usual, once you've won it, come and chat to us. More often than not, most people will actually send us the links to the auction site before they go. I'm looking at lot one, five and seven, and I expect to go this high on the niche. Can

I have some terms, please? We'll often do that for clients. So they've got an idea of what the finance will look like for each of those examples. And it also gives them visibility on, if they want to go above the list price, the guide price, which is, it almost always happens as well. They've got an idea of if they do go above the guide price, how far they can go on what that would look like. Obviously, if it's listed for 100, but they think they can go to 120, show them the finance and they can work on those things as well. So it's quite easy for clients to understand totally what they can buy, what it's going to cost, and they can go in really well prepared for that bidding war. Right. Okay. Brilliant. So just following on from

that then, why would you use auction finance and who is this for? The auction finance is primarily for anybody who cannot buy cash or doesn't want to buy cash. Because of the timescale, the 28 days to complete, you're never going to get a normal term mortgage done in that time period. It's just not possible. Unless you're a cash buyer and you've got the cash in your bank account to purchase, you'll need to use auction finance to cover the rest of the debt you haven't covered with your deposit. Most people, they will use them because if you buy an auction, having seen quite a number of auctions, it's very, very rare that you see a property that is habitable and ready day one. Most things are auctioned

because they need work. They're either in respect to disrepair, they need converting, or they need their shelves, work windows and doors, they need significant work, or their plots of land they need developing. So those types of properties, in our previous episode we spoke about why you would need a broker. That's about properties being unique or not being finished and ready for a normal term lender. So even if you could get a term lender for these examples, the properties just wouldn't be ready for them. So you need to either finish them up, decorate carpets or different manner of refurbishment needed usually for these sorts of properties. Okay, so that all makes sense. And then we've got a question here that asks,

what are the key features of auction finance? Key features of auction finance really come down to speed. That's the name of the game, is how quickly can we turn this round. So depending on the loan's value, depending on the rest of your portfolio, we can sometimes desktop value where the lender goes online, they run a couple of searches on the valuation property and they get a comfort score. So if they think that the auction price that you're paying is in line with what their software says, they'll desktop it, you get the report back in a couple of days, it means no one needs to go and physically see it. And the delay of having to value it in that change is then removed, it does speed up the process.

That's one of the key factors. And then as with all bridges, the other benefits are that the interest is rolled up. So there's no servicing the loan during the period and it allows you to go in and do varying levels of work to prepare that property for either resale or refinance. Right, okay. And then moving on, people would like to know, how do you apply for auction bridging finance? So what is the process? The process, fairly straightforward, as with regular bridging, the best way to do it is to come to us beforehand, if you're thinking of going to an auction and showing us the lot you're looking at. We can advise, we've seen a lot of projects from very good to very poor, profitable to loss making. So we can give you some very good guidance straight away on whether

we think the project is viable or whether it's going to be profitable. So it does also depend on the client's goals. Sometimes they're looking for long-term retention on a property, in which case the yield is very good. So we can discuss those aspects with you at the time we're discussing the finance. Once you've identified a few properties you want to bid on at the auction, we'll go through the auction finance with you. We'll prepare a couple of illustrations to give you an idea of the financing costs, total for those. And then depending on your preferred exit routes, whether your refinance or selling, we can then give you some illustrations showing you what the exit would look like in 12 months time. So you've got both the now and the then finance options laid

out. And it gives you a really clear picture of your costings and your future profitability on those properties too. Okay. Well, a great step-by-step breakdown there. So hopefully that's making sense to anybody listening. And speaking of costs, we have a question here that asks, what fees are involved? Are there any exit fees? Fees involved? It depends on the lender of choice, but they're usually very similar. We can expect a one and a half to two percent arrangement fee. That's the lender's cost. The interest rates between 0.5 and one percent, depending on your loan to value, but that's rolled up and included in the total repairable amount. Exit fees, some lenders charge them, some don't. It's more common to see a lender have a

minimum term built in. So you only pay for what you use with a bridging leg. If you pay, you take it over 12 months, but you pay it back after six, you only pay for the six-month interest. But if you pay it back after one month, the lender's made that money. So a lot of them will have a minimum term of maybe three months. So if you borrow it today and pay it back tomorrow, you still pay for a minimum of three months. And that covers their cost of lending the money, basically. So tell me if you consider if you are doing a property or a project that's going to return it on very quickly, look for one that either doesn't have an exit fee or doesn't include a minimum term. And on top of that, legal fees and valuations, it depends on the

number of properties being included. We can sometimes negotiate those down a little bit. As always, I tend to estimate maybe a thousand pounds for legal costs with a bridging leg, you'll pay yours and the lender's at 2000, assuming no other complexities involved. And the valuation depends on the value of the property itself. Okay. So just a few things to bear in mind there when it comes to costs then. Scott, again, we've covered quite a lot here, but is there anything else we need to consider when it comes to auction finance? Yeah, there are ways of being clever with your portfolio. So you already have a portfolio of properties, assets which aren't particularly geared highly. So you've got properties in your portfolio that are maybe 30, 40, 50% amounts of value. They have a lot of equity

that you're not using. So we could look to use what we call a cross charge or cross collateralization between securities. So if you want to buy something at auction, but you don't have the deposit to hand, we can cross charge whereby we purchase the auction property for a crude example, say a hundred thousand pounds. The bridging lender on a single asset would give you 65%. So you need to find a 35,000 pound deposit. But if you've got other properties with equity in them, we can essentially grab the equity out of the other securities and add it into the bridging leg. So you put no cash in and the lender will then put a charge on the new one you're buying at the auction and they'll put a second charge behind on your other properties

or if they're encumbered, they could first charge. And so it allows you to go into an auction, essentially without putting any of your own money into the purchase, by just using the equity in your portfolio that's already there. Okay. Well, thank you for that, Scott. Hopefully we've helped a few people out on the episode and I'm sure we'll speak to you again on the podcast soon. Fantastic. Thank you very much.