Tips on how to finance auction property
With many people facing financial difficulties in the current economic climate, it appears that auctions are becoming a common occurrence. Although this may seem like a great opportunity for property investors, there are factors that need to be taken into consideration, finds Moneybags writer Alina Hardcastle. With the assistance of experts we highlight how one should finance an auction property.
Advice for property investors attending auctions
Joff van Reenen, lead auctioneer and founding partner of specialist property auction house, The High Street Auction Company says: “As a bidder, the first steps in preparing for an auction are to fully evaluate your financial position, establish what you can afford, know your limit and, however tempting, don’t go beyond it.”
He and other experts offer the following advice:
- Deposit required: “Time is of the essences for investors attending auctions,” says Gary Palmer, CEO of Paragon Lending Solutions. He explains that auction houses require a deposit and commission to be paid immediately, and that the remaining balance needs to be paid within a certain period, usually 30 to 40 days. Palmer warns that if you can’t come up with the remaining balance, you could lose the whole deposit and commission you’ve already paid on the auctioned property.
- Home loan: Ideally as a bidder you should have the purchase amount in cash in your bank account, or get a pre-approved bond. Shaun Rademeyer, CEO of BetterLife Home Loans advises buyers to arrange a home loan well in advance, with the help of a reputable mortgage originator, who can guide them through the process and help obtain pre-approval for a certain amount. He highlights: “An added advantage of doing things this way is that you will know what your spending ‘limit’ is and be less likely to get carried away in the excitement of the auction.
- Bridging or personal loans: An alternative for those who go to an auction without arranging a home loan is to make use of personal or bridging loans. Although this is an option Rademeyer cautions buyers, saying: “Remember that these usually come at a considerably higher rate of interest than home loans.”
- Prepare documents: Whether you have a pre-approved bond or loan, Rademeyer explains that buyers will need to have certain documents prepared. These include: identify document, proof of residence, proof of income, bank statements, a list of your assets and liabilities, and a list of your monthly and regular discretionary expenditure.
- FICA process and registration fee: Van Reenen explains that by law all bidders have to go through the FICA process prior to an auction so registration is a must, and some auction houses require that bidders pay a refundable registration fee in order to participate in a sale. If a registration fee is applicable the amount can vary greatly.
- View the property: It’s important that you view property before you bid for it, as well as work out the maximum bid that you’re prepaid to make.
In most cases the property purchased at auction is not likely to be a primary residence, says Rademeyer. This may mean lenders will look for a bigger deposit and only be prepared to approve a home loan at a relatively high rate of interest.
Don’t get bidding fever
Van Reenen concludes: “Getting caught up in bidding fever on the day can have costly repercussions, because in South Africa auctions are the only legally binding verbal property sale agreements. If the hammer falls and you don’t have the funding, it will be problematic.”