Bridging finance auction purchases. How to avoid the pitfalls

What are the pitfalls of bridging finance auction purchases?

Using bridging finance for auction purchases of property can seem like a good way to grab a great deal. However, it comes with its own set of challenges. This type of buying often appeals due to potential savings and the speed of transaction. Yet, it’s not without risks. Understanding the pitfalls is key, especially when considering bridging finance to fund an auction purchases. In this guide, we’ll explore the common pitfalls buyers face, when purchasing at auction and how to navigate them.

Quick Decision-Making Pressures

One major pitfall of auction purchases is the pressure to make quick decisions. Auctions move fast, and buyers often have limited time to assess properties. This can lead to rushed decisions without thorough due diligence. It’s vital to prepare ahead of the auction, including finances and viewing the property.

The competitive atmosphere can lead buyers to bid more than they intended. Setting a strict budget and sticking to it is crucial to avoid financial strain.

Issues with Property Conditions

Properties sold at auction often need repairs. Some are sold this way because they are hard to sell through traditional routes due to their condition. Buyers may find themselves facing unexpected repair costs, which can quickly add up.

Before commiting to bridging finance auction purchases, it’s advisable to visit the property with a qualified surveyor or builder. Ask them to estimate repair costs before bidding. This step helps buyers plan their budget more accurately, including the potential need for a bridging loan to cover both the purchase and repair costs.

Legal Complications

Another significant pitfall is potential legal issues with the property. This can include unclear titles or unresolved claims. Such issues can delay or prevent the sale from completing, posing a high risk for buyers using bridging finance, as they rely on a swift sale completion.

Buyers should always review the legal pack provided before the auction and consult with a solicitor to identify any legal risks.

Mortgage as an alternative to bridging finance for auction purchases

Obtaining a mortgage for an auction property can be challenging. Many lenders are wary of financing auction purchases due to the associated risks, such as the property’s condition or legal issues. This makes bridging loans a popular choice, though they come with higher interest rates and fees.

It is also virtually impossible to complete a mortgage from start to finish within the timescales imposed by the auction house. Bridging lenders and their solicitors are geared up to do things quickly. Standard mortgage lenders simply are not.

It’s crucial to secure financing before bidding. Understanding the terms and costs of bridging finance can help buyers make informed decisions and plan for repayment strategies.

Immediate Financial Commitment

When you win at auction, you are typically required to pay a deposit of 10% immediately and complete the purchase within 28 days. This immediate financial commitment can be daunting and risky if your financing is not in order.

Ensuring that your finances, including any bridging finance, are arranged in advance is crucial. This preparation prevents the risk of losing your deposit should you fail to complete the purchase on time.

People Also Asked

Can you pull out of an auction purchase?

Pulling out after winning an auction can be costly. You’ll likely lose your deposit and may face additional fees. It’s best to be certain before bidding.

What should I check before buying at an auction?

Review the property in person, check the legal pack, and ensure your finances are ready. Consider the total cost, including potential repairs and fees.

Is bridging finance a good idea for auction purchases?

Bridging loans can be effective for covering the quick completion required by auctions, provided you have a clear repayment strategy in place, such as a pending sale or refinancing.

How can I avoid overpaying at an auction?

Set a strict budget based on thorough pre-auction research and stick to it. Avoid getting caught up in the competitive atmosphere.

What are the risks of not viewing a property before auction?

Not viewing can lead to surprises like structural issues or alterations without planning consent, which can be costly to resolve.