The number of property sales at auction is growing as the method becomes increasingly popular with property owners of all kinds. In this Q&A, we speak to Richard Watson, Head of Auctions at Knight Frank, and Sanvir Dhillon, auctions finance specialist at Knight Frank Finance, to find out why auctions can relieve the stress of a property chain, what you should consider when it comes to the financing, and why it pays to build a relationship with your lender.
Once considered the domain of professional investors, buying and selling properties at auction is becoming increasingly popular with buyers and sellers of all types – why is that?
RW: A central part of the shift has been changes to financing options. Unlike investors or developers, individual homebuyers historically have had a harder time making on-the-spot purchases because they are stuck in chains. Now there is greater ability for that chain to be more flexible through bridge lending so that people can actually participate in an auction process.
There are other aspects too. Contract terms have changed in recent years where reservation agreements allow more time and flexibility to the buyer, for example buyers have two months to complete.
SD: The increase in bridging finance – effectively short term loans - has been central with the market becoming increasingly competitive. The time pressures, however, can be pretty extreme so we find buyers often opt to use a broker that knows how to exert some control over the process, including ushering surveyors and underwriters along at a pace that makes the whole system possible.
Can you talk us through the benefits of buying and selling at auction?
RW: For sellers it’s all about speed, certainty and control of the sales process. It also generates competition and provides a fixed deadline that really focusses people’s minds.
It’s at a smaller end of the property market in terms of capital value, sub-£500,000, then sub-£1m and now sub-£1.5 million, where its popularity is growing. Sellers tell us they appreciate the control—knowing you're only going to deal with buyers that are truly buyers, and not having to commit to anyone on a promise.
Buyers are drawn by the opportunity to buy at a lower price than they may have to pay if they were given more time and control over the purchase process, as they would when selling through other routes.
What should you be considering when it comes to finance a purchase?
SD: To get the best deal it’s important to know your options. At Knight Frank Finance we are truly whole of market, with relationships with private & international banks, high street banks & building societies, and specialist lenders such as bridging lenders, which allows us to go to the whole market to source financing.
Product choice has increased rapidly in recent years, and there are some lenders that offer an auction-house product. Almost like an open-ended form of credit that can be charged against a property or another type of asset. That allows you to complete on a purchase quickly without having to do all the usual due diligence in advance.
How does the condition of the property impact the process?
SD: The state of the property is going to dictate the type of finance we can arrange. If the property is habitable, then we would usually present the option of either a bridging loan, which can be obtained promptly, or a purchase buy-to-let mortgage. Arranging a buy-to-let mortgage will likely take longer to arrange, but it will be cheaper in the long run, so the option will be dictated by the circumstances.
A significant refurbishment will often require the client to purchase in cash, or with a bridging and/or development loan.
If buyers are considering purchasing at auction as a business model, how we present the deal to the proposed lender will help. Repeat clients that present their cases well on multiple occasions will be able to obtain terms you won’t find elsewhere. Banks often welcome existing clients because they already have an understanding of the situation, with many of the due diligence checks having already been carried out. We can help you build these relationships.
If you’re considering buying or selling a property at auction, or would just like an informal conversation to discuss your finances, please get in touch. To find out more about financing an auction property, read our short FAQs here.