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First time auction purchaser


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Hi All,

 

I have seen two properties at auctions taking place in two weeks which I am keen to go for on a buy refurb let basis. If you don't mind I'd like to share my numbers and get any views as this would be my first auction purchase. They are both 2 bed properties in south London. Both properties require work, (approx £10k - had a local builder come round to give estimate at £8k):

 

Maximum willing to pay = £190k

10% deposit plus £400 sellers fees = £19,400

Bridging loan (70% LTV) therefore additional = £38,000

Terms of loan will equate to £935 per month. Assuming up to three months required (allowing an extra month) = £2,805

No minimum term required for bridging loan

 

Then looking to remortgage

 

Remortgage valuation allowing for £230k - spoken to a few estate agents and they are saying circa £240k+ so being cautious with £230k.

 

Looking at £1050 pcm rent (very similar properties have rented for £1100 very recently and refurb will be of good quality but as usual trying to be a cautious).

 

I'd be grateful if the community would comment on the strategy. Would the investors out there do it differently and if so how? I have given the main figures although I also appreciate stamp duty, solicitors fees etc. will need to be included. Keen to hear from you. Thanks in advance.

J

 

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Hi there

 

My list of 'rules' below is aimed at a general first-time auction buyer really and it is meant in a light-hearted way as no doubt you would have done many of these things already...or will do :)

 

Rule #1 - sit on your hands if and when the bidding gets to £190k as emotions can run high in an auction room and neanderthal man steps in!

 

Rule #2 - read the full legal pack on each property in detail before bidding, sometimes parts of it are published late and remember that most properties are in the auction for a reason; so your job is to establish what that reason(s) is and then can you live with it?

 

Rule #3 - get your finances in place beforehand as once the hammer falls you are committed to complete usually within 28 days and sometimes sooner or else lose your deposit. I would have a pre-approved facility in place and also a plan B back up plan if possible in an auction purchase. Oh and I am just buying a property using bridging finance and it has overrun the 28 days that you will probably be up against...

 

Rule #4 - visit the property prior to auction to see for yourself what you are heading into, ideally take someone with you if you are unsure about what to look for (I note that you have a builder's quote already so you may already have done this).

 

Rule #5 - everything takes longer than you think it will - I would allow far more time to get the refinancing done and usually work on 6-9 months myself

 

Rule #6 - fees are everywhere and creep up on you, auctioneer, sometimes a buyers fee, legals x 2 (yours and lender and possibly also the vendor - read the pack to find out), lender exit fees, new finance fees, broker fees, survey, etc, etc.)

 

Rule #7 - have a dry run at a different auction if possible before you go and buy to see how it all works and remember that you will need to take ID and pay the 10% plus auctioneer fees by cheque or immediate transfer on the day. I sat through an entire auction in London the first time I ever went and picked out two 'dummy' properties that I was trailing 'virtually' to see how they fared. I read the packs, did the due dil, and then discovered that both had been pulled from auction beforehand in any event!

 

Rule #8 - take advice from those that know better...and no that's not me...try either Sam Collett's book http://www.amazon.co.uk/gp/product/1845285239?ie=UTF8&camp=3194&creative=21330&creativeASIN=1845285239&linkCode=shr&tag=whsasato-21 or Paul Ribbons' book http://www.amazon.co.uk/Hustle-Your-Way-Property-Success-ebook/dp/B00BD73DXK/ref=sr_1_1?s=books&ie=UTF8&qid=1401135237&sr=1-1&keywords=paul+ribbons that will show both sides of the same coin - buying or selling through auction...quite eye-opening!

 

Whatever happens - keep us posted and good luck!!

 

Best

 

Richard

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

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John,

One issue I can see with your plan is the remortgage after 3 months. Unless you know of a specific lender/product then you may need to research this. I have been told on many occasions that you will not be able to remortgage for a higher amount than the purchase price until 6 months has past. Even for cash purchases.

If I am wrong and you do know of a product please let me know as I a waiting to mortgage a property after a cash deal earlier this year!

Regards

Sam.

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Hi Sam

 

It is possible, although not common...I know at least one lender that will do this: Shawbrook Bank. They will need a detailed schedule of works and the valuer will need to agree to the higher valuation obviously. That is possibly the hardest part and another reason why waiting for the so-called 'six-month rule' to kick in works well, which is why I plan on 6-9 months myself.

 

Best

 

Richard

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

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  • 2 months later...

Excellent list of rules Richard, anyone looking to buy at auction for the first time would do well to follow them.

 

You are correct to use bridging finance as the means to fund an auction purchase Johnannoh, you will never get a mortgage to complete within the limited timeframe allowed. However, Sam is also correct that almost every BTL lender will not accept an application to remortgage a property until you have owned it 6 months, regardless of the method you use to finance the purchase. There are exceptions, two BTL lenders will remortgage within that timeframe but they base their lending on the purchase price paid, not the value; which is not helpful to your strategy.

Richard is also correct that commercial lenders, Shawbrook being one, will accept applications within those 1st 6 months of ownership. As Richard also says, it is prudent to line up your exit route prior to making the purchase; if commercial lenders wont lend to you, or it is not profitable to sit on bridging until the 6 months ticks over for a BTL mortgage, you do not want to be stuck on a bridging loan...unless you can sell the property on and still come out with a profit.

Good luck with any future auction purchases Johnannoh

Kevin Wright

Positive Property Finance

Telephone: 01206 586586

Email: inspireme@thinkpositively.co.uk

Brokerage website: www.positivepropertyfinance.co.uk

Workshop website: www.ninjainvestorprogramme.co.uk

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I just bought at auction for the first time earlier this year. I'd pay particular attention to rule number 2 if I were you.

 

Rule number two should be broken down into two key parts:

 

1) Always read the legal pack - and by that, get a good SOLICITOR to read the legal pack. I've spent over £1200 in having different legal packs reviewed, but it's completely worth it. If a property has legal issues, they'll be painful to sort out and makes the property seriously difficult to shift at a later date.

 

2) Remember, always remember, seriously remember: There is always, always, always a reason that a property is being offered for sale at auction auction and not more traditional ways. Always!

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Thanks guys, really appreciate the advice. Fortunately the two lots I was interested were pulled owing to the fact that the legal packs weren't available. They will hopefully be available on the next one. I feel a lot more prepared.

 

Dhiren, congratulations on the purhase. How have you found the whole process? Sounds like the voice of experience there. You mention good solicitors, any recommendations would be gratefully appreciated? Secondly, any recommendations on good bridging companies. One issue I have had is that (for properties needing a little work) some bridging companies need you to have previous experience which I don't have!

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Most bridging lenders are good John but tough to recommend a bridger. Any bridger recommended may not want to lend in the area your property is in; or they might like the area but not your particular property; or the amount you require might be below their minimum loan; or they might require you to have prior refurb experience etc...

A specialist bridging broker armed with at the details about the property and you the borrower would be able to source appropriate bridgers, often more than one and let you choose the best available deal.

Kevin Wright

Positive Property Finance

Telephone: 01206 586586

Email: inspireme@thinkpositively.co.uk

Brokerage website: www.positivepropertyfinance.co.uk

Workshop website: www.ninjainvestorprogramme.co.uk

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HI 

 

I first bought at auction in 1982 and over the last year bought 8 properties at auction. 

 

All that has been said is very useful,  

 

One important thing to mention is "chandelier bidding" which is perfectly legal, but means that up to the reserve price the auctioneer is able to bid on behalf of the vendor.  I recently bought at an auction in London for a property in Leeds and every bid up to my first bid was made by the auctioneer.  In effect you need to assess where the reserve is and bid around it and try to get it at the reserve or just above. 

 

Also try to avoid getting "on a roll" with someone else when 10 bids can take place in a minute and add a lot to the price.  Just shake your head and then come back in later. 

 

Some of my best deals have been made with properties which don't sell by doing a deal immediately afterwards or even the next day.

 

Happy hunting

 

RobertG 

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Good point Robert about scouring the Unsold Lots section of every auctioneers website. Subject to the usual due diligence, some tasty deals may be found at good prices

Kevin Wright

Positive Property Finance

Telephone: 01206 586586

Email: inspireme@thinkpositively.co.uk

Brokerage website: www.positivepropertyfinance.co.uk

Workshop website: www.ninjainvestorprogramme.co.uk

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  • 2 weeks later...

John,

 

I use DKLM solicitors - they're a city based firm so you'll find their prices a little higher than other firms, however worth every penny. If like me you have no idea about legal documents and are relatively 'novice' in respect of auctions I'd recommend these guys. That being said, Robert G you I think I need to adopt you as my property guru - really interested in buying at auction more and being able to spot a good investment.

 

Dhiren

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an almost impossible request John. Given that bridgers discriminate based on the value, location, type of property, rate charged, size of loan; anyone using a particular bridger for their specific purchase may have worked well for them but be far less suitable for your purchase.

Your dilemma starting out is a familiar one to investors
a) try to go it alone with the objective of minimising your costs but not really having sufficient knowledge to make informed choices

B) use an experienced bridging broker (not a mortgage broker who does one or two bridging deals a year), let them select the most appropriate bridger for you

Kevin Wright

Positive Property Finance

Telephone: 01206 586586

Email: inspireme@thinkpositively.co.uk

Brokerage website: www.positivepropertyfinance.co.uk

Workshop website: www.ninjainvestorprogramme.co.uk

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  • 1 month later...

Hi All,

 

I'm doing my best not to pollute the board with multiple threads, and this is sort of in the same vein-ish.

 

I've found a property at auction that I'm keen to buy. It's in a good university area, 3 bedrooms, £25,000 guide price. Based on previous auctions, I reckon it'll go for just short of that. It does require a lot (A LOT) of work, however I'm lucky in that my investment partner is pretty capable as an all-rounder in terms of plumbing/electrics/fittings/etc, so we can potentially do a lot of the work ourselves, and the capital we have could provide us with a bit of a backbone to do that. I'm not in a position to buy outright (even if I really tried my best to scrape it together), so I'm looking at options for mortgaging.

 

Here are my questions:

  1. Is it likely that I can get a mortgage of £16250? I'd look to deposit £8750 as that's the trigger to 65% LTV, leaving me with a shockingly small mortgage - which would be ideal considering the £600pcm rental potential (quoted on the listing, but also common in the area and in similar properties on the same street).
  2. With that mortgage, would the typical 10% deposit at auction count towards the deposit in my mortgage or am I looking at providing a deposit against £22500?
  3. Would lenders give me a BTL mortgage against "potential" rental income considering the work needed in the property.

This will be my first foray into BTL, and I understand auction isn't exactly the safest way, however the potential detriment is tiny due to the fact that we can comfortably absorb the mortgage cost when we have no tenants and we have the ability to carry out a lot of repair/installation work ourselves.

 

Any thoughts?

 

Thanks,

Jamie

 

PS, Richard Brown, I love the list, we'd already inadvertantly carried out a couple of the items and it's amazing how much you can learn by doing those dry runs!

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Hi Jamie

  1.  it is impossible for you to get a mortgage of £16,250. Almost every BTL mortgage lender has a minimum property value of £50,000. One has a minimum property value of £40,000 and that's it. if you have a property worth less than £40,000 it is unmortgageable
  2. the 10% deposit you pay at auction does count towards the deposit in the eyes of a mortgage lender. Of course it is irrelevant in your example, see 1. above
  3. Mortgage lenders never give a mortgage against potential rental income or potential value. At point of purchase they only ever lend against current value. For a BTL mortgage, your property has to be rentable day 1 i.e. the lenders surveyor will look at your property and ask "would anyone pay to rent this property?" if his opinion is no, you are declined. There are a couple of lenders the do a light refurb mortgage; the emphasis being light i.e. a cosmetic refurb but these are by no means simple to arrange

The best option to purchase a property of this condition and value is cash. As you say cannot raise that much cash, your other option is bridging finance; even then this property is too cheap for almost every bridger...although I have sourced a  bridger who will lend at this low level for my clients.

Before you do either of the above, your big question must be...by doing A LOT of work to the property, how much will you be able to increase its value to? Can you get it to value up above £50k, or even £40k? If yes, you can buy using cash (someone else's if not yours) or bridging; then refinance onto a mortgage. If no, then you can never get the cash back out for the purchase price and the cost of works.

Kevin Wright

Positive Property Finance

Telephone: 01206 586586

Email: inspireme@thinkpositively.co.uk

Brokerage website: www.positivepropertyfinance.co.uk

Workshop website: www.ninjainvestorprogramme.co.uk

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