Auction finance

The commitment happens at the hammer

At a traditional auction, the fall of the hammer is exchange of contracts. You sign the memorandum, pay the deposit and the sale is binding. There is no cooling-off period, no survey clause and no opportunity to renegotiate because the funding did not come together.

If you cannot complete, you lose the deposit and you can be pursued for the seller's costs and losses, including any shortfall if the lot is resold for less. That is the whole reason auction finance exists as a distinct piece of work: everything that would normally happen after an offer has to happen before a bid.

So the sequence we work to is: identify the lot, read the legal pack, establish which lenders would consider the property, obtain an indication, set a maximum bid, and only then go to the room. Bidding first and arranging finance afterwards is how deposits are lost.

Traditional and modern method are not the same sale

These two are routinely confused, and the consequences of confusing them are expensive.

Traditional auction. Exchange happens on the hammer. The deposit is paid on the day and completion normally follows within 28 days, as set out in the particular auction's conditions. The timetable is short and it is not negotiable, which is why bridging is the usual funding route.

Modern method of auction. You do not exchange on the hammer. Instead you pay a non-refundable reservation fee and enter an exclusivity period, within which you are expected to exchange, followed by a further period to complete. The overall timetable is longer, which sometimes makes a conventional mortgage achievable.

The important part is that under the modern method the reservation fee is generally not refundable if you do not proceed, and it is often a substantial sum that does not come off the price. It also typically sits on top of the price rather than within it. So the modern method gives you more time and still exposes you to real money if the funding fails.

Establish which method a lot is being sold under before you do anything else, because it changes the deadline, the funding route and what you stand to lose.

The legal pack is the part people skip

The legal pack is published before the sale and you are treated as having read it, whether or not you have. Have a solicitor go through it before you bid. What turns up in it regularly changes the funding, and occasionally changes whether the lot is worth buying at all.

• Title defects: missing title, absent deeds, unregistered land, or no proper right of way to the property
• A short lease, or a lease with onerous terms, which narrows the lender list sharply
• Ground rent provisions that escalate, which many lenders will not accept
• Service charge arrears, or major works already notified on a block
• Tenants in occupation, and whether the tenancy can actually be brought to an end
• Special conditions that shift the seller's costs to the buyer, or shorten the completion period
• Missing building regulation sign-off, planning breaches, or an enforcement notice
• Restrictive covenants, and rights held by third parties over the land

Send us the legal pack as well as your solicitor. Several of the items above determine which lenders can be approached, and it is far better to know that before the sale than to discover it while the completion clock is running.

Why most lots cannot be bought with a normal mortgage

Two things rule out a conventional mortgage on most auction lots: the property and the timetable.

Properties reach auction precisely because they are hard to sell in the usual way. Empty and derelict houses, no kitchen or bathroom, fire damage, subsidence, unusual construction, a short lease, a title problem, part-built projects, or a repossession being sold quickly. A mainstream lender wants habitable property with clean title, so it declines.

Even where the property would qualify, a full mortgage application from scratch does not reliably complete inside a traditional auction's timetable. That is why bridging is the standard route: it is designed for speed and it can be secured on property a term lender would refuse. The bridge then gets repaid by selling the property, or by refinancing onto a mortgage once the work is done and the property is mortgageable.

If you already hold a mortgage offer on the lot and the timetable genuinely works, use it. Just do not assume it will.

Setting a maximum bid that includes the costs

The price you bid is not the money you need. Work out the total before the sale and write it down, because the room is a poor place to do arithmetic.

• The deposit, payable on the day, in the form the auctioneer accepts
• The auctioneer's buyer's fee or administration charge, which is in addition to the price
• Stamp duty land tax at the rate applying to you and the property, which your solicitor or accountant will confirm
• Your legal costs, and in many auction contracts the seller's legal costs too
• The lender's arrangement fee, its valuation fee and its legal costs
• Interest for the whole period you expect the bridge to run, since it is usually rolled up
• Works, and a contingency on the works
• Insurance from the moment of exchange, because the risk passes to you then
• Our own fee, which we disclose in writing before you apply

Then stop at your maximum. The bid that goes one increment beyond the plan is the one that turns a good lot into a loss.

How deposits are actually lost

Deposits are lost to the calendar, not to unavailable funding. The money is usually obtainable; what runs out is the time to get a valuation done, a legal pack queried and a lender's solicitors satisfied inside a completion period that started the moment the hammer fell.

What we can and cannot do before the sale

Being precise about this matters, because it is where expectations go wrong.

We can establish which lenders have appetite for the property and for you, put the lot and the legal pack in front of an underwriter, and obtain an indication of terms so you know the likely cost and the likely amount before you bid. Because we deal with lenders' own underwriters rather than a packager, that indication comes from someone who can actually make a decision.

We cannot instruct a lender's valuation ourselves. What we can do is ask the lender to instruct its valuer, and where a sale is imminent we ask early. We also cannot guarantee any lender's decision, and nobody honestly can. Any pre-auction indication remains subject to the valuation, the legal pack and full underwriting, and if we are not comfortable that funding will follow, we will tell you that before the sale rather than afterwards.

Regulation and what happens at the end of the term

Most auction finance is not regulated by the Financial Conduct Authority, because the property is usually being bought as an investment, to refurbish and sell, or for commercial use. On unregulated lending the mortgage conduct rules do not apply and you cannot take a complaint about the lending to the Financial Ombudsman Service.

Where the security is a property that you or an immediate family member will live in, the loan can be a regulated mortgage contract instead. We confirm which applies on the facts of your case before approaching a lender.

Your property may be repossessed if you do not repay the loan at the end of the term.

That is not a formality. A short term loan has a fixed end date, and the exit — the sale, or the refinance onto a term mortgage — has to be real. We test it before the loan is placed, and if it does not hold up we say so.

How we handle an auction case

Specialist enquiries reach Nik Mair, our managing director, on the working day they arrive. Come to us with the catalogue entry and the legal pack, not with a signed memorandum.

• We confirm whether the lot is traditional or modern method, and what the completion deadline actually is
• We read the legal pack for the things that affect funding, alongside your solicitor's review
• We establish lender appetite for that specific property before the sale
• We ask the lender to instruct its valuer as early as the timetable allows
• We help you set a maximum bid that includes every cost, and tell you if we think the numbers are tight
• We test the exit — sale or refinance — before the loan is placed, and set out our fee in writing beforehand

What we charge

Our fee is typically £495, though complexity moves it, and it is always disclosed in writing before you apply. Each stage of the fee is earned when that stage is reached and is not refundable after that point. Separately, you have the right to cancel within 14 days, as set out in our Terms of Business. We are usually also paid a procuration fee by the lender.