Can You Get a Mortgage on an Auction Property?

Key Takeaways

• The short answer is “no”. Whilst, in theory, it’s possible to secure mortgage finance against a property sold at a traditional (28 day) auction, the chances of getting it approved and completed on time are pretty much zero.
• Although specialist arrangements such as “hunter’s licence” facilities do exist, they are typically used by experienced investors and usually require the lender to have reviewed the property well before the auction.
• If you intend to rely on a conventional mortgage, buying through Modern Method of Auction is the better option.  The longer completion period gives lenders sufficient time to carry out valuation approvals, underwriting and legal due diligence.
• Most professional auction buyers instead use a staged approach: acquire the property using cash or bridging finance, refurbish or resolve any legal issues, remortgage and either rent (also known as BRRR) or sell the property.
• Above all, success at auction comes from preparation. Understanding the property’s condition, legal position, financing options and exit strategy before bidding is far more important than trying to arrange a mortgage after the hammer has fallen.

The initial focus is to seek out below market value properties with clear value-add potential.

These include refurbishment opportunities, short leases, probate, problem tenancies, planning gain,  development opportunities, title or other complex ownership situations.

Experienced buyers will scour the auction legal pack before bidding.

This can include the title documents, special conditions, lease details, searches (where available) with a fine tooth comb to identify anything that could affect refinancing.

Taking into account the inherent built-in biases, it’s well worth running the pack through your AI tool of choice.

Should anything remain unclear or potentially problematic, instructing an experienced auction conveyancer to review the documentation can be money well spent.

Physically inspecting the property before bidding is always a wise idea.

The aim is to assess the condition, likely refurbishment costs and whether the property could realistically become mortgageable after improvement works.

Arranging a full RICS survey before every auction purchase is often impractical and expensive. Instead, many buyers will bring along a trusted builder, contractor or tradesperson to help identify structural issues, damp, roof problems, outdated services and the likely cost of remedial works.

It’s fairly common to see unmortgageable properties at auction.

Common issues include severe disrepair, missing kitchens or bathrooms, structural movement, non-standard construction, legal restriction and short leases.

The key is understanding not only what the problems are, but also the likely full cost, complexity and timeframe involved in resolving them before the property becomes acceptable to mainstream mortgage lenders.

Professional buyers should know their exit strategy before the bidding even starts.

For some, the plan is to refurbish and refinance onto a buy-to-let mortgage (as discussed above). Others may improve the property and sell it on at a profit (i.e. “flip”) instead.

Although a sign of poor auctioneering practice, some traders also target auction “arbitrage” opportunities.  This involves buying underexposed lots from one auctioneer before reselling them for profit through another with better marketing.

As discussed above, it’s crucial to arrange cash, private funding or bridging funding before the auction begins.

This gives certainty that the transaction can be completed on time and avoids the financial penalties should the relevant auction deadlines not be met.

Experienced investors will often begin discussions with specialist mortgage brokers and lenders before bidding even starts.

The aim is to understand what the refinance or long-term lending position could realistically look like once the property has been improved or stabilised.

Over time, focusing on building a strong network of brokers, lenders and finance professional should be a key objective. Keeping track of changing mortgage criteria, rates, lending appetite and the myriad of macro factors will all help secure the most effective exit strategy possible.

Traditional auctions normally require a 10% deposit immediately when the hammer falls.

Buyers also need to budget for auctioneer fees, legal costs, bridging arrangement fees and, in many cases, the higher rate Stamp Duty Land Tax surcharge applicable to additional property purchases.

Professional buyers will usually reverse engineer the deal before bidding even starts – working backwards from the refinance values minus refurbishment costs, finance and a range of other overheads involved to calculate their maximum bid.

One of the fastest ways to lose money at auction is getting caught up in emotion or FOMO once bidding starts. To avoid falling into this trap, use proxy bidding or leave strict bidding limits in advance to avoid overpaying in the heat of the moment.

At a traditional auction, exchange of contracts happens instantly once the auction closes successfully. This means that you will usually have to transfer the 10% deposit into the auctioneer’s client account.

At Property Solvers Auctions, buyers have 24 hours for the funds to appear in our client account (but most transfer immediately).

Completion is usually required within 28 days, although some auction contracts may differ slightly. For example. 42 days is not unheard of for commercial and mixed-use property sales.

This is why fast-access funding is so important within the auction market. Failure to complete on time can result in losing your deposit and incurring “abortive” financial penalties.

After completion, resolving whatever issues prevented mainstream mortgage lending becomes paramount. This often involves refurbishment works, structural repairs and modernisation.

Here it becomes crucial to closely monitor refurbishment costs, timescales and other holding costs during this stage.  Unnecessary delays can quickly erode profit margins – particularly when expensive short-term finance is involved.

The focus may be also on resolving legal or title related issues with a good conveyancing solicitor. This can include extending a short lease, removing restrictions, regularising planning or building regulation matters, or addressing other defects highlighted within the legal pack.

Once the property becomes mortgageable, investors can then refinance on to a standard buy-to-let mortgage with lower long-term borrowing costs and rent the property out.

Investors will then typically choose between fixed-rate or tracker mortgages depending on their appetite for certainty versus flexibility. The right option will usually depend on interest rate expectations, cash flow requirements and the investor’s longer-term strategy.

Other investors may choose to sell the property – typically on the open market – and recycle the capital into future projects.  Selling some and retaining others can also be a wise strategy.

If the refurbishment and repositioning have been done properly, the aim should be to bring a high-quality product to market that stands out from competing listings.

Before selling, it is important to understand the tax implications – whether that involves Capital Gains Tax (for properties owned in your personal name) or Corporation Tax (for those owned in a corporate structure).

Certain HMRC allowances, improvement and finance costs may potentially be offset, so good accounting advice is a must.