Reply to: Contractor mortgages for auction properties

[Mark McBurney@CMME]

A delay in the process wouldn't mean you lost the 10% deposit, it means that you would pay interest during the period between when you were due to complete and when you actually completed. You would only lose the deposit if you weren't able to complete at all.

Not always, it depends on the terms of the auction. Some have a strict 28-day 'all or nothing' deadline.

[TheFaQQer]

It's good to know this, at least I can dampen down my missus expectations and prepare her that if we do it a bridging loan is most likely going to be needed if we get that far

Life is never simple

Buying and selling property at auction is inherently risky, for all parties.

I saw one property sell at the auction, and the guy said to the staff "I'll just go and grab the chequebook from the car" and disappeared completely. I can't begin to imagine how the vendor felt after going through the elation of selling and then having it ripped away from you at the last minute.

Make sure you know your limits - I know people who only bid by proxy because they know the temptation to add "just one more bid".

[TheFaQQer]

It certainly can be done, but there are inherent dangers of trying it. If you can afford to take the risk of potentially losing the 10% deposit, then it could be worth a try.

A delay in the process wouldn't mean you lost the 10% deposit, it means that you would pay interest during the period between when you were due to complete and when you actually completed. You would only lose the deposit if you weren't able to complete at all.

[MicrosoftBob]

It's good to know this, at least I can dampen down my missus expectations and prepare her that if we do it a bridging loan is most likely going to be needed if we get that far

Life is never simple

[Mark McBurney@CMME]

If you have the mortgage in principle organised with the lender, then the only thing that adds delay from there is them actually getting into the property and valuing it.

So, if you are planning on buying at auction, get the mortgage in principle lined up beforehand, and make sure you have enough cash for the deposit straight away - normally 10% plus charges plus VAT, to be paid there and then.

And don't forget to turn up at the auction with your photo ID and other things as required by money laundering legislation - the last thing you want to do is get there all ready to go, and then find that you can't bid because you forgot your ID.

A mortgage in principle is nothing anywhere near a mortgage application.

A mortgage in principle is just a credit scoring exercise, nothing more. You could approach HSBC and give them the figures from your contract, and they'd probably give you an AIP - totally aside from the fact they will never lend against contract value in a month of Sunday's.

You cannot submit a full mortgage application without property details, so the only way to get the ball rolling early is to apply for a mortgage for a property that you don't know yet whether you're buying. Not the most prudent idea in the world.

Even the absolute fastest lenders will take 3 weeks from application to offer, if you're really, really lucky, so I can absolutely guarantee that no mortgage broker will commit to guaranteeing a mortgage offer within 28 days.

It certainly can be done, but there are inherent dangers of trying it. If you can afford to take the risk of potentially losing the 10% deposit, then it could be worth a try.

EDIT: Not meant as a diatribe towards you, apologies!

[jamesbrown]

When I did it, it took a day between speaking to Freelancer Financials and getting an agreement in principle in place. It took three weeks between the auction date and the valuation - mainly because no-one could get hold of the vendors to get into the property because they had already left the country.

The mortgage broker should have some kind of indication of how long it should take, though - FF were "reasonably confident" that it could be done in the four week time scale.

In the end, when the valuation came back, it meant that we wouldn't get a mortgage on that property, so we had to use alternative funding to complete the purchase. We could have walked away and lost our 10%, or we could have walked away and lost more than 10%, so unless you are in a position to write off those kinds of sums, then I agree that it is a risky proposition to rely on a mortgage when buying certain kinds of property at an auction.

I never thought that we wouldn't get a mortgage on the property - based on the fact that it was habitable (the family had lived there for seven years), had a better kitchen and bathroom than my current house, and was mortgaged with HSBC.

I think that's illustrative of some of the risks, but also of managing them properly, as you had an appropriate back-up in case the mortgage fell through.

[TheFaQQer]

Sure, but the timetable is much more compressed with an auction (you begin with exchange and proceed through completion) and, hence, the risk is considerably greater when relying on a mortgage, not least because the mortgage provider has not agreed to finance that property in advance, only to the principle of finance. Personally, I wouldn't consider a mortgage as auction finance. As Mark suggestions, a large fraction of people are cash buyers or use bridging loans, preferring to remortgage later on (i.e. after 6 months). YMMV.

When I did it, it took a day between speaking to Freelancer Financials and getting an agreement in principle in place. It took three weeks between the auction date and the valuation - mainly because no-one could get hold of the vendors to get into the property because they had already left the country.

The mortgage broker should have some kind of indication of how long it should take, though - FF were "reasonably confident" that it could be done in the four week time scale.

In the end, when the valuation came back, it meant that we wouldn't get a mortgage on that property, so we had to use alternative funding to complete the purchase. We could have walked away and lost our 10%, or we could have walked away and lost more than 10%, so unless you are in a position to write off those kinds of sums, then I agree that it is a risky proposition to rely on a mortgage when buying certain kinds of property at an auction.

I never thought that we wouldn't get a mortgage on the property - based on the fact that it was habitable (the family had lived there for seven years), had a better kitchen and bathroom than my current house, and was mortgaged with HSBC.

[jamesbrown]

In that respect, it's no different from exchanging contracts an failing to complete on any house purchase. If you fail to complete on time, you would then be served with a notice to complete, giving you ten working days to complete - during that time you would be charged interest.

If you still fail to complete, then the vendor can either go to court to force you to complete - if they have any indication that you have the funds available, then they would almost certainly win that. Alternatively, the vendors can put the property back for sale. If they get less than the price you agreed to pay, then they can sue you for the difference between what they got and what you promised to pay, plus some expenses. If they get more than you agreed to pay then they get that. You lose your deposit either way.

Failing to complete on time does not mean that the whole sale falls through automatically, though.

Sure, but the timetable is much more compressed with an auction (you begin with exchange and proceed through completion) and, hence, the risk is considerably greater when relying on a mortgage, not least because the mortgage provider has not agreed to finance that property in advance, only to the principle of finance. Personally, I wouldn't consider a mortgage as auction finance. As Mark suggestions, a large fraction of people are cash buyers or use bridging loans, preferring to remortgage later on (i.e. after 6 months). YMMV.

[MicrosoftBob]

And don't forget to turn up at the auction with your photo ID and other things as required by money laundering legislation - the last thing you want to do is get there all ready to go, and then find that you can't bid because you forgot your ID.

Looks like I'm going to have to be prepared to turn up and not bid for a few months, but that usefull to know

[TheFaQQer]

Auction properties and mortgages don't tend to add up to be honest, as even with the quicker lenders out there you're looking at between 3-4 weeks for mortgage offer from the point of mortgage application, after winning the lot at auction.

A lot of people who buy at auction use other forms of funding, either cash or bridging finance etc.

If you have the mortgage in principle organised with the lender, then the only thing that adds delay from there is them actually getting into the property and valuing it.

So, if you are planning on buying at auction, get the mortgage in principle lined up beforehand, and make sure you have enough cash for the deposit straight away - normally 10% plus charges plus VAT, to be paid there and then.

And don't forget to turn up at the auction with your photo ID and other things as required by money laundering legislation - the last thing you want to do is get there all ready to go, and then find that you can't bid because you forgot your ID.

[TheFaQQer]

If you fail to complete, you will lose the deposit and can, in theory, be pursued for damages too (although I don't think this is common).

In that respect, it's no different from exchanging contracts an failing to complete on any house purchase. If you fail to complete on time, you would then be served with a notice to complete, giving you ten working days to complete - during that time you would be charged interest.

If you still fail to complete, then the vendor can either go to court to force you to complete - if they have any indication that you have the funds available, then they would almost certainly win that. Alternatively, the vendors can put the property back for sale. If they get less than the price you agreed to pay, then they can sue you for the difference between what they got and what you promised to pay, plus some expenses. If they get more than you agreed to pay then they get that. You lose your deposit either way.

Failing to complete on time does not mean that the whole sale falls through automatically, though.

[Mark McBurney@CMME]

Auction properties and mortgages don't tend to add up to be honest, as even with the quicker lenders out there you're looking at between 3-4 weeks for mortgage offer from the point of mortgage application, after winning the lot at auction.

A lot of people who buy at auction use other forms of funding, either cash or bridging finance etc.

[jamesbrown]

It's certainly possible, but all auction sales involve an increased degree of risk unless you're a cash buyer. If you fail to complete, you will lose the deposit and can, in theory, be pursued for damages too (although I don't think this is common). You should try to mitigate this risk as far as possible by having a survey completed in advance of the auction (this is recommended practice anyway, unless you know what you're doing) and take someone along that could provide a realistic valuation. If you haven't attended an auction before, I recommend you attend several before bidding. Remember that guide prices are systematically pitched below selling prices, and they are typically also below reserve prices (although not always). It's easy to get carried away in an auction setting, so you must define a limit in advance. In terms of timelines, I'm not sure whether the MMR materially increases the risk in terms of completing on time, but this is a condition (typically 20-28 business days, as indicated above, but you should always have the legal docs reviewed and relevant searches conducted).

[mickael28]

I did ask about this as well. Basically, I was told that you have to do everything before hand, ie, that you could apply for a mortgage through a contractor mortgage specialist but you had to pay the following before hand, per house:
* valuation
* contractor mortgage specialist
* solicitor

with the risk that you get outbidded or the house is taken out of the auction before you can bid anything on it.

I think in our case was around £2,000 upfront and as soon as possible, as otherwise they might not have time to do things on time. At the end we didn't go for it, and the house didn't even reach the auction...

[TheFaQQer]

You should still be able to get a mortgage in principle, as it's no different from getting one if you were then looking to buy via a more conventional route. When we did ours, I had a mortgage in principle with the Halifax via Freelancer Financials. The problem came when we actually won the auction and the surveyor came round for a visit.

As long as the property is habitable and would normally be mortgageable, then you shouldn't have a problem. If you know exactly what property you are interested in, then you can get the mortgage company to come and do a valuation for you as if you were already down as the buyer - you would then know what they would be prepared to lend you if you were successful.

Many auction sites go a few viewings beforehand, and if you speak to them they will try to accommodate additional ones if you seem keen enough, so if you arrange with them and go with the surveyor at the same time, then you can ask them any questions as well.

Bear in mind that many surveyors will take the sales of similar properties into account when they do the valuation, so if you are looking at something out of the ordinary (a Georgian church, for example), then they may have problems with coming up with a valuation anyway because they have nothing to compare it to.

Auctions will expect 10% deposit when the hammer goes down, and then completion within 28 days (unless otherwise specified in the auction pack), so you need to be good to go as soon as you win the lot.

Pay no attention to the guide price - with many auction houses, that's just the reserve price that the sellers have set. Most auction houses will give you the chance to negotiate if the property doesn't reach the reserve price, so you may have a way in there if the one you are after doesn't get where you need it to be.

Personally, I'm quite tempted by this lot in June...

but my wife will kill me.