Buying a Holiday Let at Auction: What You Need to Know

Have you considered buying a holiday let property at an auction? In this guide you’ll learn how key factors like holiday let mortgage financing, timescales and due diligence differ when buying at auction, and how to avoid common mistakes. You’ll understand why some properties don’t end up in the usual estate agent’s windows and websites, and why buyers tend to explore auctions for holiday lets. We will explain the auction process, the stage at which many buyers trip up. You’ll learn about essentials like pre-bidding due diligence, establishing the benefits of the location, and identifying the letting potential. And we’ll explain the specific costs involved in auction purchases.

We’ll also discuss the ins and outs of the auction process, any pitfalls, plus the financial differences behind buying at auction and buying the regular way. At the end we’ll answer a series of common questions people often ask about buying holiday let property at an auction, and provide a simple checklist.

Why do some holiday lets end up at auction?

Holiday lets end up at auction for much the same reasons as regular homes. In most cases it’s to do with the property itself not being suitable to sell the traditional way. Maybe it needs a lot of work, or is in such a bad condition it is generally not considered easily sellable by estate agents. They may be unmortgageable in their current condition. Perhaps the seller wants to free up the money quickly via a guaranteed sale. It could be an inheritance, or someone just getting rid of a place they don’t want. All this means buying a potential holiday let property through an auction can snag you a bargain.

Can you get a mortgage to buy a holiday let property at auction?

Yes, you can, but the process is dramatically different from buying a property the usual way. Compared to buying through an agency it is an extremely fast process. It involves legally binding events that can tie you into hundreds of thousands of pounds.

Modern property auctions come with a set of strict timescales and procedures. Firstly you put down an initial deposit, read the legal pack, and arrange your own survey. Usually, on the fall of the gavel, you must pay a non-refundable reservation fee. You have 28 days to exchange and another 28 days to complete, a maximum of 56 days in total, although obviously it can happen a lot faster.

There are other variations, including traditional auctions where you must provide 10% of the purchase price on the fall of the gavel, exchange at that point and complete 28 days later.

How easy is it to get a mortgage for an auction property?

Most ordinary holiday let mortgage processes often take 4 to 8 weeks just to get a mortgage offer and the legal process can sometimes take a further 12 weeks, making it virtually impossible to match auction buys to the traditional mortgage process. The timescale is so different you could easily be left with onerous financial commitments that you can’t meet unless you happen to have spare cash available. Combined with the stress and pressure for everyone concerned, you can see why regular holiday let lenders prefer to swerve this type of scenario.

As a mortgage advisor, under Consumer Duty regulations laid out by the Financial Conduct Authority, we have to reasonably spot foreseeable harm. If someone is entering into this large financial commitment without the money they need in place, ready and waiting before the deadline, they could end up in real trouble. If it’s a £200,000 purchase and you have £200,000 in cash, it isn’t an issue. If you don’t, what do you do? Again, another reason that regular mortgages don’t suit this process.

Buying holiday let properties at auction means taking some degree of risk in buying a place you know little about, and maybe haven’t even seen in real life. There’s so little time to do the right amount of due diligence, but if you’re happy with all that you can find yourself a really good deal. This is why people who carry out property refurbishment make money: they buy places no one else wants at auction, make them saleable as fast as they can, then sell for a decent profit.

About auction bridging finance – AKA bridging loans

Bridging finance, also called a bridging loan, is by far the most popular way to finance auction property purchases. As a specific type of short-term finance available for general property purchase, you don’t tend to get bridging loans subdivided into different categories like residential, buy-to-let, holiday let, second home or anything else.

A bridging loan against a property is typically a 6 to 12 month loan, and it can move very quickly. How viable it is depends almost entirely on the property itself, and this is the key risk assessed by the lender. In return for this speed and flexibility they charge a considerable price, usually the interest rate is often around 1% a month or 12% per annum (more than double the usual interest rate on a mortgage) and significant upfront fees of 1 to 2% of the loan value.

Other fees: legal, broker and survey fees

Legal fees alone can add up to several thousand pounds, involving a specialist lawyer who will work fast to meet the auction framework, not your usual conveyancer for a regular residential process. The broker fees can stack up to 1% or 2% of the loan value and a surveyor may charge a premium for acting quickly. All of which makes a bridging loan an expensive business. But if you have found the right property and can make profit from the transaction, a bridging loan could be the ideal solution.

You can get bridging loans to buy from auction and also to buy and refurbish. You borrow an amount of money to cover the purchase of property, then the lender provides more money on a drawdown basis to pay for refurbishment.

One of the most common conditions behind being approved for a bridging loan is proving you have a reasonable exit strategy to free yourself from the loan quickly. To do this you need to take an honest look at the future and make realistic, achievable assumptions about what you’re going to do with the property once it’s refurbished. Will you sell it on the open market or are you planning to refinance it, using a normal holiday let mortgage to pay off the bridging finance?

Common answers – About buying a holiday let in an auction

Why buyers consider auctions for holiday lets?

People buy holiday let properties at auction for a variety of reasons:

• Below-market prices, sometimes truly amazing bargains
• Unique properties full of character
• The chance to buy a property with an existing rental history quickly
• A popular route for probate sales, repossessions, and properties needing renovation

The auction timeline — the biggest difference

The auction timeline (under the Modern Method of Auction) is very different from buying the ordinary way through an estate agent. Reservation fees are required on the fall of the hammer with exchange of contracts taking place 28 days later and completion 28 days after that, much faster than a standard 8-12 week conveyancing timeline. As you can imagine this short, stress-filled timeline is the single biggest pitfall for buyers.

Financing an auction purchase — where most buyers trip up

Mortgage offers in principle aren’t enough. Buyers need to be genuinely confident their full mortgage offer will be ready in time.

Holiday let mortgages involve specialist lenders, valuations that take projected rental income into account rather than simpler Assured Shorthold Tenancy rental assessments, and tend to take much longer to underwrite than residential deals.

Bridging finance is a common solution to this 28 day deadline, followed by remortgaging onto a holiday let finance product afterwards.

Do detailed due diligence before bidding

Due diligence belongs before the auction, never afterwards, because there isn’t a cooling-off period. You will need to carefully review the entire legal pack containing the property title, searches, leasehold info if applicable and more via a solicitor beforehand.

Surveys and structural checks are incredibly important. Auction properties are often sold precisely because they need work, sometimes not just tatty but in far too poor condition to sell the usual way.

You also need to understand the ins and outs of holiday let viability, exploring essentials like planning status. Is there a restriction preventing holiday use, for example a principal or permanent residence condition? What about Article 4, and the local council’s stance on short-term lets?

It is wise to check the property’s existing furnished holiday let trading history and income if the property is being sold as a going concern. It’s also a good idea to pin down a realistic letting income if you are going to turn what was an ordinary home into a holiday let.

Checking the location and letting potential

Checking the location and pinning down the letting potential involve finding out about:

• The proximity to popular tourist attractions and landscapes
• Whether there is on-site parking or convenient parking nearby
• Any coastal or Area of Outstanding Natural Beauty restrictions
• Local short-term-let licensing schemes, which are increasingly relevant in the UK. Some councils require you to register the property
• Comparable rental performance from estate agency estimates

The specific costs involved in auction purchases

• Hammer price
• Reservation fee, non-refundable even if the purchase falls through
• A buyer’s premium or auction administration fee (an extra charge on top of the final bid price, paid to the auction house)
• Auction legal fees
• Auction administration fees

A brief practical checklist

Get your ducks in a row before you decide to buy a place at auction. Being prepared can make all the difference between success and disaster:

• Arrange the finance in principle before bidding
• Study it yourself and get the legal pack reviewed by a specialist solicitor in advance
• Set a maximum bid based on the total cost – hammer price + premium + fees + renovation
• Have the funds ready to move fast on completion