For homebuyers who are considering buying at auction rather than on the open market, peer-to-peer real estate investment platform, easyMoney, has produced a guide on auction financing – what it is, why it’s important, and how much it costs.
Why buy a home at auction?
Buying property at auction provides two overarching benefits. First, property can be found at a very reasonable price, especially if the buyer is willing to undertake some renovation duties. And second, the process is extraordinarily fast which, when the open market buying process moves so slowly, is seen as a significant benefit.
This speedy process is largely due to the fact that, once the hammer has fallen, the winning bidder is required to hand over a 10% deposit and is then given around 30 days to provide the full payment. Unless it’s a cash purchase, this means you’ve got 30 days to find financing.
What is auction financing?
Because of the strict time limit, traditional loans from banks or mortgage providers are rarely an option because they take so long to finalise.
This is why auction buyers often turn to auction financing which is a type of bridging loan designed specifically for auction purchases.
An application for auction financing takes no time at all, and the funds can be available in just a matter of days.
How does auction financing work?
Auction financing is offered on a very short-term, often interest-only, basis. As such, loans are usually repayable within 1-24 months.
The process of granting a loan can be very fast, especially if the buyer can put down an initial deposit, or offer another property to use as security, and also demonstrate that they have a clear exit strategy for repaying the loan at the end of the term.
The most common exit strategies are remortgaging the property or, if it’s a flip purchase, selling the asset on and using part of those funds to pay off the loan.
How is interest charged?
There are three common ways for interest to be charged on auction financing.
The first is to pay off the interest monthly and then repay the full loan at the end of the agreed term.
The second is called ‘rolled up’ which means the monthly interest is not paid off but instead accumulated and added to the loan amount at the end of the term when the whole thing must be repaid.
The third method is similar to the second, but sees the lender calculate the interest that will be owed over the loan period and add it to the loan itself, which means you’re essentially borrowing the interest as well as the lump sum. The combined sum must be paid at the end of the agreed term.
Jason Ferrando, CEO of easyMoney said, “Auction financing can be a real life-saver. Sometimes, only an auction can provide the kind of property that a buyer needs or wants at the price they’re willing to pay, but the timelines the auction house gives to provide full payment are strict to say the least, but this is why the process works so well.
Auction finance means that people can benefit from the perks of the auction house without having the stress of scrambling around to secure a traditional loan in the space of four weeks. No matter how much preparation you’ve done before heading to auction, this is almost impossible.
For lenders and investors, too, auction financing is a beneficial sector to operate in. Short-term loans often command higher-than-average interest rates which means great returns on investment, and also the short-term nature of the loans means that lenders get their money quickly rather than having to wait years on end for returns to arrive as is the case with many other investments and loans.”
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