Case Study: Auction Finance during Lockdown for Multi-Unit Freehold Block without Planning

02 Mar 2021

Case Study: Auction Finance during Lockdown for Multi-Unit Freehold Block without Planning

Client Background: In this case, the Revolution team dealt with a professional property investor looking to finance a fast turnaround auction property purchase. The client had already successfully bid on the property at auction and had six weeks to complete the purchase.

Property Information: This property was based in East Sussex. It was a freehold block of eight residential flats, with existing tenants.

The buy to let units comprised eight individual apartments and had been converted into residential use in 2006. Unfortunately, the owner, at the time, did not seek planning permission for this change of use.

One of the further challenges was that the auction purchase took place during the Coronavirus lockdown. Of the eight tenants, some were isolating and others were not comfortable with a valuation due to the restrictions around contact, and so it was impossible to carry out a full inspection with access to all of the units.

Financial Requirements: Secure auction finance borrowing within six weeks, without a full valuation and during the pandemic lockdown. The client required immediate financing to cover the £450,000 auction finance balance due.

The Revolution Brokers Solution:

We consulted with our client to understand the value of the investment and to create a strategy to overcome the obstacles to finding sufficient financing in the lockdown climate.

Our first task was to identify a solution to ensure that the purchase could complete in the six-week deadline, in the absence of a full valuation. Revolution negotiated with the lender to explain the scenario and agreed on a partial desktop valuation in the interim, with inspections of the communal and external areas that remained safely accessible.

We recommended a bridging finance loan as a short-term solution to ensure the client did not lose their auction deposit and fail to complete it in time. Revolution arranged the bridging loan for up to a 12-month term but was able to exit in one month.

Given that the property did not have planning permission to change the use of the eight residential flats, we negotiated an indemnity policy with the lender to ensure they were happy with the potential risk factor.

Once the lender released the bridging finance and the purchase completed, we implemented an exit strategy in just one month with a high street lender offering a highly competitive rate. They accepted a proposal to expedite the transaction, allowing the bridge to be exited smoothly onto the new rates.

 

Property Valuation:

£1,085,000

Total Mortgage Borrowing:

£450,000 bridging finance

£570,000 mortgage exit strategy

Loan to Value Ratio:

41% bridging loan LTV

52% mortgage LTV

Negotiated Interest Rate:

0.5% per month bridging finance

2.32% mortgage exit strategy

Mortgage Term:

One month bridging loan (with a 12-month term)

Mortgage 25-year term, with a five-year fixed interest rate

Monthly Payment Value:

£2,283.75 bridging loan

£1,101.99 mortgage exit strategy

Arrangement Costs:

1.5% bridging loan

2% mortgage exit strategy

Rental Income Achieved:

£70,500 per annum for the eight residential flats

 

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Author

Almas Uddin

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