- 2nd November 2023
- Posted by: DMM
- Category: Development Finance
Buying a property at auction can have great benefits such as certainty of your acquisition and competitive purchase prices but what is involved in raising development finance for auctions?
If you are the successful bidder at a property auction then you will be asked to sign contracts on the day and this means that you are then committed to completing. You will have to pay the deposit on the day, usually 10% of the purchase price, together with any auction fees. Often the time between this ‘exchange of contracts’ and the completion date may be anywhere from 7 days to 56 days. This does not give you a long time to secure development finance and, therefore, brings risk.
Even 30 days is a tight timescale to conclude a valuation, QS report, legal investigations and the lenders credit approval process; but it is possible will some advance work.
Often the time between this ‘exchange of contracts’ and the completion date may be anywhere from 7 days to 56 days. This does not give you a long time to secure development finance and, therefore, brings risk.
To mitigate the risks of securing your development finance for auctions, it is important to do your homework
- Know your bidding limit. Ensure that you have carefully costed the likely building works involved for the project. Be careful to ensure you have sufficient contingency, allow for all your professional fees, stamp duty, auction fees and any fees related to the exit route.
- With your detailed appraisal we can obtain indicative terms from potential lenders and this will allow you to calculate the cash you need to input and your maximum auction bid. We’ll also aim to have back up heads of terms, just in case your preferred lender withdraws for any reason.
- Read the Legal Pack. Have your solicitor check the legal pack for any implications that may affect your proposed project. These might include flood risks, boundary or access rights, covenants, any special conditions, any neighbour disputes, up-to-date local searches and so on. Dual solicitor representation can also help speed the process.
- Valuation. Lenders experienced in providing development finance for auctions will be geared to work fast and this may include using an Automated Valuation Model (AVM). An AVM is a term that enables lenders to use a software based pricing model to estimate the property value and is much faster than sending a valuer out to personally see a property.
- Know Your Exit Route. Be sure that you investigate your likely sales values through your own research together with independent local estate agent advice. If your exit route is to be Buy-to-Let (BTL) then we will get indicative terms to support your proposal. Be aware that BTL markets are volatile and offers will depend on many factors with some negatives being where a property is above food outlets or when they have a short lease.
Whilst never risk free, Developer Money Market can help you mitigate the risks of buying a property development project or BTL investment at auction. Development finance for auctions is possible and can be organised quickly when you work in advance of the auction day.