Auction finance: funding a property you win at auction

Property auctions reward people who have done the work in advance and punish everyone else. The moment the hammer falls you are contractually committed. There is no cooling off period, no subject to finance clause and no renegotiating because a survey disappoints. Your deposit and potentially more is at risk if you cannot complete.

Auction finance exists to make that deadline survivable. This guide covers how it works, what to put in place before you register to bid and how to get from a short term facility onto something affordable for the long run.

The 28 day problem

At a traditional auction, exchange happens on the fall of the hammer and completion is required within the period set out in the legal pack, most commonly 28 days and sometimes as tight as 14 or 20 working days. You pay a deposit on the day, usually 10% of the hammer price, plus the auctioneer's buyer fee.

That timetable rules out an ordinary mortgage. A commercial mortgage or buy to let application involves a full underwrite, a valuation booked in the normal queue and legal work with no particular urgency. Six to ten weeks is a realistic run. You will miss the deadline.

So auction finance is almost always a bridging facility: short term, secured by a first charge on the property, assessed primarily on the asset and your exit rather than on trading history, and capable of completing in two to three weeks where the title is clean and solicitors are instructed properly.

One variation to watch. Modern method of auction, sometimes called conditional auction, works differently. You win the right to buy, pay a reservation fee and then typically have 28 days to exchange and a further 28 to complete. That 56 day window is just about workable for a term lender on a straightforward property, but it is still tight and the reservation fee is usually non refundable. Read the terms, because the two models are not interchangeable.

What to arrange before you bid

The work that determines whether an auction purchase succeeds happens before the sale, not after. Do all of the following.

• Get an agreement in principle on a facility, not just an idea of one. Approach a lender or broker with your intended maximum bid, the lot details and your exit plan, and get indicative terms in writing. Lenders are used to issuing terms against a specific lot before the auction date.
• Read the legal pack properly, and have a solicitor read it too. This is where the money is made or lost. Short leases, absent title, restrictive covenants, missing building regulations sign off, tenants in situ with protected tenancies, service charge arrears, rights of way and a special conditions section that shifts the seller's costs onto you. Lenders will decline on issues buried in a legal pack, and the pack is the one document most bidders skim.
• Instruct a solicitor who does auction work. Not merely a good solicitor, one who has completed on auction purchases to a 28 day deadline. On almost every auction deal the limiting factor is legal work rather than credit. Brief them before the auction so searches and enquiries can begin the next morning.
• Inspect the property and price the works. A viewing, ideally with a builder, and a written cost estimate. Assume you cannot see behind the walls.
• Set a walk away number and write it down. Work backwards from your exit value, deduct works, finance costs, fees and your required margin, and bid no higher. Auction rooms are designed to push you past this figure.
• Know your exit before you raise your hand. Sell on completion of works, or refinance and hold. The lender will ask, and your answer determines whether terms are offered.

Deposits and the cash you need on the day

Bridging funds the bulk of the purchase but not all of it, and the gap is cash. Expect to need the following.

• The 10% deposit, payable on the day by card, bank transfer or cheque depending on the auction house. This comes from your own funds, not the loan.
• The auctioneer's buyer fee, charged in addition to the hammer price and often a fixed sum or a percentage plus VAT.
• The balance of your contribution. If the lender advances 70% of value you fund the other 30% plus costs.
• Stamp duty land tax, payable on completion, with the additional rate applying to second and investment properties and to corporate purchasers. Budget for it early, because it is frequently the item that breaks a tight deal.
• Legal fees for both sides, yours and the lender's, plus searches and the valuation fee.
• The arrangement fee, typically in the region of 1% to 2% of the loan, usually deducted from the advance, which reduces the net sum you actually receive.

Work out your total day one cash requirement before the auction and have it liquid and available. Funds sitting in a notice account or dependent on another sale completing are not available funds.

How the valuation works against the hammer price

This is the single most misunderstood part of auction finance. Lenders advance against the lower of the hammer price and the independent valuation figure, and the valuer is usually working to a 180 day marketing period rather than an agency estimate.

Two consequences follow. If you buy well, at say £200k for a property valued at £260k, you do not automatically get to borrow against the £260k. Most lenders will base the day one advance on the £200k you paid, so a 70% loan to value gives you £140k and you fund £60k plus costs. Some will consider the higher valuation where the discount is clearly evidenced and the purchase is below market value for a defensible reason, but do not assume it. Plan on the purchase price.

If the valuation comes back below the hammer price, the advance falls with it and you make up the whole difference in cash. On a £300k purchase valued at £270k with a 70% limit, the loan drops from £210k to £189k and you need an extra £21k you had not planned for. You are still contractually bound to complete.

The defence is leverage headroom. Borrow at a comfortable margin below the maximum available rather than at the ceiling, so a soft valuation reduces your buffer instead of your ability to complete. And where you own other property, know in advance whether additional security could be offered at short notice.

Refurbishment costs and a survey that comes back worse than expected

Most auction stock needs work, which is usually why it is at auction. There are two ways to fund it.

A straightforward bridge covering purchase only, with works funded from your own cash, is simplest and completes fastest. A refurbishment facility advances the purchase on day one and then releases the works budget in stages, each drawdown released after a monitoring surveyor confirms the previous stage is complete. Staged drawdowns mean you finance the works as they happen rather than borrowing the whole sum upfront, but you need working capital to fund each stage before the release lands. Confirm whether releases are made in arrears, which is normal, and how many working days each inspection and payment takes.

Where the survey comes back worse than you priced, remember the critical point: you exchanged at the hammer. There is no renegotiation. Your realistic options are to inject more cash, add a second charge or additional security to raise the facility, reduce the scope of works to what is needed to reach a lettable or saleable standard, extend the term so the works can be funded from income or staged more slowly, or sell on once the position is stabilised. Pick one quickly. The expensive outcome is drifting toward the end of the term with the job half finished.

The practical lesson for the next lot is to build a contingency of a meaningful percentage of your works budget into the bid calculation and to treat the builder's first estimate as the optimistic case.

The exit to a longer term facility

Bridging is deliberately short and priced monthly, so the exit is the plan, not an afterthought. Where you are holding the property, that exit is a refinance onto a term facility: a commercial investment mortgage or a limited company buy to let style product over a longer period at a much lower annual cost.

Start that refinance application well before the works finish, not after. Term lenders will want several things in place. The property must be complete and in a lettable or usable condition, with building regulations sign off and any required certification. Rental income is tested against the payment, typically needing to cover it with a margin rather than merely match it. Some lenders apply a minimum ownership period, often six months, before they will refinance a recently purchased property, and some will lend against the improved value while others cap the advance at your total cost of purchase plus works, which changes how much equity you release. For lettable residential property the energy performance rules also matter, with a minimum standard currently in force and tighter requirements under discussion, so factor the certificate into the works schedule rather than discovering it at the end.

Where the exit is a sale, price realistically from the start and market before completion of the works rather than after. The cost of three extra months of bridging interest usually exceeds the extra you hoped to achieve by holding out.

What to do next. Before the next catalogue lands, pick your target lots, send us the lot details with your maximum bid and your exit plan, and we will come back with indicative terms and a day one cash figure so you know exactly what you can bid to. We compare 50+ lenders, we arrange business funding only and we are an independent commercial finance broker. Business purchases of this kind sit outside FCA regulation, so read the facility letter, the default interest terms and the legal pack with proper advice before you bid.

Can I get auction finance in 28 days?

Yes, and that is exactly what the product is built for. A clean first charge on a straightforward title can complete in two to three weeks. What makes it possible is preparation: indicative terms obtained before the auction, a solicitor already briefed and the legal pack reviewed in advance. Starting the process after the hammer falls is what causes missed deadlines.

What happens if I win the lot and cannot complete?

You lose the 10% deposit and the buyer fee, and under the standard auction conditions the seller can also pursue you for interest, costs of resale and any shortfall if the property sells for less second time around. This is why finance and cash should be arranged and confirmed before you bid rather than afterwards.

Can I use auction finance for a commercial or mixed use property?

Yes. Bridging is available on commercial units, mixed use buildings, land and part built sites as well as residential investment stock. Loan to value is generally lower on specialist assets, valuations take longer and the exit needs to be more clearly evidenced, so allow extra time and expect to contribute more cash on day one.