If you are a first time investor, then getting auction finance for property developments may seem a little daunting and complicated, but it doesn’t have to be. One thing that is certain is that if you are planning to buy a development at auction, then you’ll need to move quickly and get the finance sorted fast. Working with a mortgage broker who has experience of development finance will help you not only avoid potential pitfalls, but ensure you can focus on the project in hand. Read on to learn more about auction finance for property developments.
What is Auction Finance for Property Developments?
Whatever the development is, whether it is big or small we can usually find a solution. Auction finance can take many different forms, from short term loans, bridging finance to normal commercial lending solutions. The key is to make sure it fits your circumstances and your business plans. Make sure you build in the overall cost for arranging the auction finance into your business plan and remember if you can turn the development around quickly, you won’t need the finance for long, so relatively it doesn’t have to cost that much.
The key with arranging finance for property developments is you have to usually move very quickly (particularly if you have won an auction and not previously arranged any funding). The problem is you usually don’t have the time to wait to secure finance in the traditional route. That just won’t work. So what’s the solution?
Auction Finance Solutions for property developments:
If you have time, plan ahead before and get in touch with a Commercial Mortgage Broker like us. Maybe there are other options open to you rather than just auction finance? If there is, it could be cheaper!
Could you raise money on another asset you own before the auction? Or may be you only want to arrange the auction finance once you have secured the deal at auction.
Either way, it is advisable to plan before an auction so you can work out the best strategy and plan. We can help you do this as we are independent and have specialists in different areas from commercial, development, bridging investment, and residential finance.
We won’t just be blinkered by one solution (as some commercial brokers who don’t have specialisms in other areas), but we will be able to look at your bigger picture and work out what is best for you. This is really important as we can properly plan your exit strategy and make sure a viable solution is in place.
Of course, if your exit strategy is to sell then, this planning for a longer-term finance solution is not required. But it can be really helpful if you are buying a dilapidated property at auction which needs work and which you intend to either keep and rent or use as a future home.
What if I need auction finance for a development quickly?
Simple, get in touch NOW…..
We will discuss with you your options and help you take the next steps which might include:
- Looking at auction finance solutions which might include bridging lenders to determine which one will be best
- Looking at your existing assets to see if something can be done there quickly
- Looking at alternative funding solutions through the peer to peer market which can work well as an alternative to bridging
So what’s the key for development finance at auction?
One of the most important elements with auction finance for property developments in understanding what your plans are and what your exit strategy is? Is the property run down and you intend to spend some money on it to rent out as a buy to let?
Maybe you want to buy an unmortgageable property to do up and live in? Or maybe you are a developer looking to make a profit quickly by doing a property up and selling?
All these different scenarios might need a different approach to secure the auction finance for the development. Importantly we need to make sure you can move forward too. In other words, help you re-finance quickly if that is your exit strategy (repay the auction finance to something cheaper).
What else should a property developer consider when it comes to finance at auction?
Auction finance is really evolving and there are some really interesting innovative lenders and solutions out there. Provided someone has enough equity in existing assets in addition to maximizing the borrowing on an auction property, they could in effect borrow 100% of the purchase price plus build costs!
So in a scenario where a developer can see an opportunity he can use equity rather than cash (or a mixture of both) to fund the purchase and the development. He can then sell take the profit and move on.
If you are planning ahead there are some major benefits to organizing the finance prior to an auction:
- Base the borrowing on the value pre-auction. If the property sells for less, your funding is still based on the pre-auction valuation which means more funding for you and less capital invested. Not all lenders work this way, but some do!
- If you waited for a valuation after you had won the auction the borrowing would be based on the purchase price. If the pre-auction valuation was higher than the purchase price, this would mean your borrowing capacity would be less.
Auction finance innovation:
One thing to be aware of is that there are a lot of private lenders, funder’s, and financiers who are appearing in this sector and keen to lend. I have written about this before and explained the importance of being careful about who you get into bed with as your financial partner.
However, one innovation for auction finance that can be great for property developers is JV (joint venture) partners. JV partners will often fund 100% of the project and share in the spoils. But like all these things, it’s important to pick the right JV partner.
Of course, don’t think that anyone can get a JV partner. The developments and the returns need to be attractive to these investors, plus specific criteria will have to be fulfilled. But for the right person and the right deal, this can be a great solution in which you both share the risk and reward.
How much will auction finance cost me?
I have written another blog going into a bit more detail on likely costs and fees. But without sitting on the fence it really does depend on what you are looking to do, your experience, how quickly you need it, your personal circumstances, and the type of auction finance that is required.
With some auction finance solutions the debt has to be serviced on a monthly basis and with other lenders, you can roll the interest up so you don’t have to pay any monthly payment as you just pay when you repay the debt (by either re-financing to another lender or selling the asset).
Typical fees are:
- Arrangement fees (usually around 2% of the loan)
- Valuation fees (the cost of the lender undertaking a survey on the property to establish its value)
- Legal fees (including legal documents, insurance and your own surveys)
- Redemption penalties (a fee payable to the lender if you pay off your debt before the agreed term).
You may have many more questions so please feel free to get in touch, we would love to help.