How Can I Buy a House at Auction with No Money?

It’s a well-known fact that once you’ve placed the highest bid at a property auction, you are legally obligated to complete the purchase.

However, this doesn’t necessarily mean that you need to have all of the cash available right there and then.

In this article, the quick auction sale experts at Property Solvers explain how to buy a house at auction with no money.

We’ll explore how to get finance for auction property and other ways in which you can fund your purchase – so you don’t find yourself financially high and dry with no recourse.

How to Buy at House at Auction with No Money

Joint Ventures / Equity Share

Many cash poor property buyers seek out joint venture finance.  Here, as an example, a partner or investor contributes the cash to acquire the property alongside the necessary investment funds to undertake the project.

You, as the “lead” partner, would put in your own “sweat” equity to bring the project to fruition.  This can include obtaining planning and/or undertaking the development / refurbishment work. In return, you will agree on a profit share beforehand.

Please be aware of the risks of moving forward with a joint venture / equity share agreement (when dealing with auction purchases or not). There are also Financial Conduct Authority (FCA) regulations to be aware of in this space (known as PS13/3).

Seller Finance

A seller may possibly be open to arranging finance.  They would offer you a “loan” which you gradually pay off in order to take over the property.

Most auction sellers want to avoid any drawn-out process, of course, so this is rare.

However, if they are concerned that their lot will be withdrawn due to lack of interest otherwise, they may see such a proposal as their only option.

Loans from Private Lenders

You can arrange a “hard money loan” from a private lender to cover the costs of buying at auction.

These loans are short-term, and usually require collateral in the form of an asset such as property. If you’re able to secure a loan of this kind, you can borrow up to 70% of the value of the property (or sometimes more).

You would then need to source the remainder equity (in this case 30%).  Auction buyers sometimes approach joint venture partners or friends/family for this purpose.  The lender would probably want to assess the legitimacy of this capital.

This auction property finance option is popular with buyers who have lower credit scores. However, the interest rates are relatively high.

There are also personal loans available from banks and credit unions. You’ll need good credit, but again, these often pay out quickly. You may also be able to arrange repayment over a longer period of time. It’s vital to make sure, however, that you have a clear plan to pay the loan back.

Bridging Loans

Broadly similar to hard money loans, bridging loans are commonly used for auction property purchases.

These are relatively quick to access – and many reputable providers pay out in under 28 days.

This means it’s possible to use these loans for an “unconditional” (traditional) auction sale that requires you to pay the full amount owed within a month after the auction hammer (gavel) falls.  The buyer must also transfer a deposit of 10% (in most cases) into the auctioneer’s client bank account on the day itself.

There are also auction bridging options that can fund this initial downpayment with a view to providing the remaining 90% upon completion.

However, as with most secured loans, the bridging provider is likely to want to see an equity input.  This is typically around the 25-30% mark.

Here, again, many cash poor auction buyers work with joint venture partners (who will take an equity stake).  Bridging lenders, compared to other types of secured finance providers, are likely to be more receptive to this kind of financial structure.

Bridging loans are short-term arrangements that tend to be interest only.  The lender will also want to take a first charge on the property.

It’s also worth speaking to a good mortgage broker about ‘Bridge to Let’ products.  These work really well for properties that need refurbishment work.  Financing an auction property in this way sometimes also means that the amount of capital input is kept to a bare minimum (providing the numbers work well).

Equity from an Existing Property

If you already own a property, you may be able to arrange for equity release to cover some – if not all – of the upcoming auction purchase.

Equity release should only be attempted if you have been paying off a mortgage for some time, or if you own the property outright. Otherwise, you run the risk of losing the existing property or making very little money if you sell it.

It’s possible to undertake equity release multiple times, but it’s definitely worth consulting a financial advisor in order to attempt this.

In short, be careful not to over-expose yourself.

Peer to Peer Lending / Crowdfunding

This is a relatively new approach to getting finance for auction property.

There are numerous online platforms where a prospective borrower can search for relevant lenders who may agree to provide a loan. The lender then receives interest and eventually gets their money back in full.

This approach will usually only cover you for part of the money you require, as property loans often have an upper limit.

There are also examples of equity crowdfunders that some auction buyers have had some success with.  However, this sector has become increasingly regulated over the last decade or so.

It’s also often difficult to get the funding organised in line with most auction houses’ strict timelines.

100% Mortgages

Before the financial crisis of 2007/08, it was surprisingly common for buyers to borrow as much as 100% of the property’s value.

Such leniency, however, was arguably one of the main contributory factors that led to the recession in the UK.

As a result, the 2014 Mortgage Market Review led to stricter top-down controls on lending ratios.  In most cases, borrowers must now put so-called ‘skin in the game’.

Whilst you may find some niche property auction lenders that are willing to offer 90% and even up to 95% products, the interest pay rates are likely to be higher and there may well be other conditions involved.  If you then look to fund the deposit with a joint venture / equity partner, expect extra due diligence on the source of the funds.

If this seems like a suitable option to you, there are a few steps to take before committing to this route. These are:

1. Researching lenders with a track record of auction property mortgages
2. Arranging a survey of the property (or organise a builder to check things out if there’s not enough time)
3. Estimating the property’s value – as accurately as possible
4. Getting a “mortgage in principle”
5. Sticking closely to your budget when bidding

Your mortgage in principle is a document that shows you have been pre-approved for a mortgage. It’s definitely worth checking the small print for any conditions that may cause your finance to fall through later on.

Auction property mortgages are based on the value of the building (assessed by an independent surveyor / valuer). For this reason, you should avoid accidentally bidding higher than intended on the day.

It’s also worth noting that mortgages of this kind are usually only available for property that is deemed fit to live in.

Conclusion

If you’ve been wondering how to finance an auction property without much cash up front, the above approaches should help.

Naturally, it is always best to have enough to hand for the deposit, otherwise you’ll be running a significant risk. If you are unable to pay, the seller reserves the right to sue – so it’s best to have a good legal and financial adviser on hand to assist you throughout the auction process.

Property Solvers are experienced auctioneers who are always at hand to help buyers with their financial needs.  Please do not hesitate to get in touch.  We’re open 24/7!