Property auctions: breaking the speed limit

At the beginning of October 2008 Auction Finance Limited celebrated the successful conclusion of their first year’s trading. This was no mean feat for a lender who opened their doors at almost precisely the moment when the first waves of the credit crunch had begun to take a serious toll on the UK’s property market and banking system. But as their name suggests, Auction Finance Limited have focused their efforts on delivering funding for a very specific section of the market. The firm provides specialist finance for property professionals purchasing at auction and unlike other finance houses that offer this facility they do so to the exclusion of all other types of lending, offering a product and service that is tailored to meet the precise needs of this particular clientele.

The world of property auctions has not been immune to the downturn affecting the broader property market. Early predictions that landlords and investors would work themselves into a bidding frenzy to bag the best of the 45,000 repossessions predicted by the Council of Mortgage Lenders have so far proved to be unfounded.  Regular statistics issued by the Essential Information Group, universally acknowledged as the authority for facts and figures relating to the UK auction market, show that sales performance entered a period of decline in Q2 2007. Success rates have hovered between 50-60 percent for much of the later part of 2008, approximately 10 percent lower than the average figure achieved in the previous year, and although repossessed properties now make up an estimated 21 percent of all lots on offer bidders have been left hungry for keener pricing that reflects the falling market.

Scott Hendry, New Business Manager at Auction Finance Limited, believes that the tide is beginning to turn. In October he told Estates Review that the activity he had witnessed at auction houses throughout the country led him to conclude that sales performance would shortly begin to improve. He also believed that the efforts of auction houses to educate their sellers on realistic reserves would begin to pay dividends. Sure enough, when the Essential Information Group published their statistics for September his predictions were borne out and success rates topped the 60 percent mark for the first time since April.

It seems that having spent their first year establishing relationships with many of the major UK auction houses, Auction Finance Limited could now be in prime position to provide the required funding for investors that are looking to capitalise on what has once again become a competitive market and a viable source of below market value properties. With this in mind Estates Review sat down with Hendry to find out what makes his company stand out from their competitors….

An interview with Scott Hendry of Auction Finance Limited

Organisations that provide finance for auction buyers always emphasise the speed of their service. 
Why is this so important?
The standard completion period at auctions is 28 days and before the credit crunch there were still bidders with astute brokers who operated using traditional mortgage products. As the number of mortgage deals on the market falls and lenders tighten their belts this is becoming incredibly difficult. What do you do when you realise that you only have a week left to find the cash for completion and your broker says they’ve exhausted all their options? You speak to a company like ours who, provided the necessary conditions are met and your solicitor is ready to go, can get your funds to you in 24 hours.

I think one of the reasons we’ve prospered during the past year is that many committed buyers have found out, usually at the last hour, that their broker or their bank can’t help them anymore. They come to us because we can work quickly then they come back because they’ve seen first-hand how easy it is to use our service.

Speed is also important in the auction room itself. We attend many sales where bidders can come to us for on-the-spot lending decisions for the lots on offer that day. Some come to us after they have made their winning bid but many want to be confident that their funds are secure before they start bidding. We might only have a ten minute window to make our lending decision so it’s very important to be able to work fast.

How are you able to work so quickly when a normal mortgage application can take several weeks?
There is some important technology involved, but it comes down to making quick decisions based upon a deep understanding of the market. We also have an excellent network of auction houses and agents who can help us to satisfy our underwriting requirements quickly and without cost to the borrower. One of my colleagues describes what we do as “Logical Lending” and I think that really encapsulates our approach. We’re not a tick box lender and we don’t get bogged down with restrictive criteria or excessive paperwork.

Another factor that allows us to advance funds rapidly is that we have essentially underwritten the case by the time we issue our ‘decision in principle’. This means that if the client contacts us prior to an auction we’re prepared to advance their funds before they even know for certain that they need them! Of course, I need to stress that there is no cost involved at this stage. If they have not incurred any expenses with us, but we’ll still be happy to consider the funding for any other properties they may be considering.

Aside from speed, are there other benefits to using a service like yours instead of a bank or high-street lender?
Yes. A lot of mainstream lenders are quite prescriptive about the properties they will lend against in terms of type, condition etc. This can be problematic for investors that want to acquire properties which are in need of renovation and redevelopment before they can be considered suitable for a conventional mortgage. We work on the basis that even if a property isn’t in the best condition it still has a value, which makes it a viable form of security. This means we can lend in situations that a lot of banks would rule out even if the buyer’s plans and circumstances made the deal an attractive proposition. For example, we once met a developer at auction who had just won a substantial property in South London. He intended to convert it into flats and told us he was relying on his bank to provide the finance, but a few days before he was due to complete they withdrew their offer because of a perceived issue with the current sanitation facilities! The building was going to be re-plumbed anyway as part of the conversion process. Fortunately the gentleman had kept hold of my card and we were able to advance his funds within the required timescale.

If the current economic climate continues to curtail banks’ lending capabilities do you think this will benefit services such as yours, or are the negative consequences of recession inevitable in all sectors?
This is actually quite a complex question. It’s true that the lack of alternative funding lines has helped us to establish a good client base of investors that are still willing and able to buy, but there are two sides to the story. Most of our current clients are serious property people who saw the house price correction coming and had limited exposure in terms of their overall facilities; there were many others buying at auction prior to the crunch who have now been pushed out of the market because they don’t have enough cash in the background.

Two years ago you could pick up property at auction and refinance within a few weeks at a level that allowed you to recoup your initial outlay. In the current climate that isn’t possible and it can now take up to six months to accomplish this kind of transaction. This is one reason that transaction levels began to fall off in the second half of 2007. Those who relied heavily on high LTV refinancing opportunities to continue making acquisitions suddenly found that the products they needed weren’t there, and with their portfolios already geared up to the limit they had no capital to draw on. The more experienced investors saw what was happening in the market and reigned in their buying activity in anticipation of the bargains to come.

Now we are in a situation where the experienced investors are starting to buy again, and some of them are buying heavily. From their point of view house prices are the best they’ve been for two years! We should see transaction levels improve as this trend gathers pace, and I hope that Auction Finance Limited will continue to acquire new clients as a result, but the auction market as a whole is unlikely to see activity returning to the kind of levels experienced in early 2007 until positive measures like the recent rate cuts improve the overall availability of credit and raise the number of people who are in a position to buy.

So how would someone go about securing finance from you; what are the processes involved?
Well, let’s say we receive an enquiry from a client who is interested in a lot at a future auction. We’ll take down some very basic details and have a chat to find out a bit more about them and their plans for the property. We then perform some checks to satisfy ourselves as to precisely who we are lending to and what we are lending on. As I said, we are able to do this very quickly and we would hope to call the client back within an hour with our lending decision. If requested we can issue them with our Auction Promise document which sets out precisely what we have done to arrive at our figure and constitutes an agreement to advance the funds if they are required. It also spells out any conditions that are attached, but these are generally negligible and represent due diligence on our part.

Assuming the client wins the lot we’ll congratulate them and ask that they provide details for their solicitor. When possible, we’ll instruct that solicitor to act on behalf of both parties and this is another factor that allows us to speed up the funding process. I can’t stress enough how important it is that investors who are committed to buying at auctions have a first class solicitor behind them. Occasionally we’ll encounter one who says it will take a week to fulfil our instructions; this doesn’t have to be the case. My personal “speed record” from enquiry to funding is three hours. This is exceptional and we prefer to say “24 hour payouts are possible under the right circumstances,” but it illustrates just how fast our process can be when everyone is on the ball.

Scott Hendry, Auction Finance Limited
New Business Manager
auctionfinance.co.uk