What Happens if You Buy at Auction and Can’t Get Finance?

One of the main reasons the property auction industry has grown so much in recent decades is the fact that buyers can access mortgage finance.

However, with the rules so much stricter these days, it’s common to hear of property auction finance falling through after the hammer (or gavel) comes down.

In this article, the auctioneers at Property Solvers explain your options if things turn financially sour after you’ve contractually agreed to buy a property at auction.

What if My Auction Property Finance Falls Through?

Have you found a great deal at a property auction but your finance has fallen through?  Please do not panic.  There’s almost always a solution.

Please note, however, that you will still be liable for the full amount due, as your bid constitutes a legally binding contract.

Unlike estate agency sales, you cannot drop out after your offer is accepted. A lot being declared “sold” is the equivalent of the exchange of contracts via an estate agency.

This means there is a very strong risk that the seller will sue you for the amount if you do not pay for the property in full. Furthermore, in this scenario, sellers are well within their rights to withhold the 10% deposit paid.

How Much Time Will I Have to Resolve the Situation?

Much will depend on whether the auction sale is Unconditional or Conditional:

Unconditional Sale (28 Days from the Fall of the Auction Gavel)

“Unconditional” sales require the buyer to pay a 10% deposit (and exchange contracts) on the day of the auction. You’ll need to pay the rest of the funds within 28 days under normal terms.

Conditional Sale (56 Days from the Fall of the Auction Gavel)

“Conditional” auctions (usually online) provide buyers with a longer period of time.  This is usually a 28 day “exclusivity period”, then a further 28 days before the completion of the sale.  Auction buyers usually use this time to get the finances in order.

If you pull out of the sale due to a lack of finance, you’re at risk of losing the buyer (or reservation) fee alongside abortive costs charged by the auction house and conveyancing firm.

Bridging Loans

Unless you work with a good broker who can turn things around on time, the most common solution to deal with a situation like this is to seek bridging finance from a reputable provider.

Most bridging lenders do not have the same level of strict criteria as mortgage companies. This means that you can usually access the capital required to complete the auction sale on time.  You can then seek to swap to a long-term lender once you have some breathing space.

Using this strategy, it’s sometimes possible to buy an auction property for no money down (provided your numbers are good).

The main downsides of using bridging lenders are the monthly interest payments due (which are 5 to 6 times normal mortgage rates) alongside the minimum tie-in periods (usually 3 months) and arrangement (or entry / exit) fees.  You’ll also have another set of legal fees to pay.

Nonetheless, in many ways, it works out better to go down this route relative to not completing the auction purchase.

Borrow Money from Friends or Family

You may be able to find funding from trusted friends or family.

Much here often depends on the price of the auction property.  For instance, if you have agreed to purchase in the South or Greater London, the amount of money you’ll have to borrow could be unfeasibly high.

If you do go down this route, even though the people you borrow from are well-known to you, we always recommend having legal documentation drawn up by a qualified solicitor.

Finding a Different Mortgage Provider

Usually, you can arrange a mortgage within four to six weeks.  This is often an insufficient amount of time to have the finance in time for the completion of an unconditional (28-day) auction sale.  However, it’s entirely possible for conditional (56-day) sales.

On the plus side, as you probably already would have a RICS survey and all the necessary financial information in place from the previously rejected application, you may well be able to “port” it all over.  In other words, much of the heavy lifting is already done.

It is best to approach mortgage lenders that have a track record in providing finance for auction properties. In doing this, you should be able to receive a “mortgage in principle” reasonably quickly.

This means that all relevant checks have been carried out and that you have been pre-approved for a mortgage.  You can then complete the auction purchase within the stipulated timeframes.

Conclusion

In our experience, if your auction finance has fallen through, the best approach is to seek out bridging and/or suitable mortgage lenders as quickly as possible.

Auction houses like Property Solvers have in-house teams of finance specialists who can help you navigate through these issues.  Please contact us 24/7 and we would be more than happy to help.

If the situation becomes desperate, it may be possible to sell the property on while the settlement period is still in play to recoup some of your losses. However, it’s likely that you’ll need to let it go for a reduced amount.