How to finance an auction property
Property auctions are becoming a more common occurrence in South Africa in the current economy.
However, while this might seem like a good thing for property investors hunting for ‘bargain’ buy-to-let opportunities, they should make sure that they have their finances in order before putting in the winning bid, said Shaun Rademeyer, CEO of mortgage originator, BetterLife Home Loans.
“In most cases,” he said, “you will need to be able to pay or provide guarantees for a 10% deposit on the fall of the hammer. You will then need to come up with the balance within a certain time period – usually 30 days – and if you are not paying cash, you will need a home loan.
“And in that case, it would really be advisable for you to arrange this well in advance,” he said.
Rademeyer warned potential bidders to seek financial advise on a spending limit prioir to auction. “You will know what your spending ‘limit’ is and be less likely to get carried away in the excitement of the auction.”
The property expert said that the alternative for those who go to auction without arranging a home loan is to make use of personal or bridging loans – but he cautioned that these usually come at a considerably higher rate of interest than home loans.
“And either way, there are certain documents that you will need to have prepared – including your identity document, proof of residence, proofs of income, bank statements, a list of your assets and liabilities, and a list of your monthly regular and discretionary expenditure,” he said.
In most cases the property purchased at auction is not likely to be a primary residence, Rademeyer said, which 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.
Potential buyers should try to view the property before bidding for it, “and also work out the maximum bid you are prepared to make – no matter what”.
“Remember, if you overbid, you will be the one that has to deal with the gap between your lenders valuation of the property and the price you have agreed to pay – and will probably have to cover the shortfall yourself,” Rademeyer said.
Read: Finally, some good news for home buyers in South Africa
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