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Alternative financing for auction buyers

17 Mar 2015

Property auctions are becoming a popular method of selling and buying property in South Africa. However, often the time taken by banks to approve loans hinders time-sensitive property auction transactions, and makes it difficult for buyers to secure the transactions. As a result, more buyers are turning to alternative lenders who are able to provide flexible finance solutions in just a couple of days.

It can take up to three months to arrange a deposit from traditional lenders, which is far too long for buyers who have to abide by the auction houses’ stringent and contractually binding deadlines. 

This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says the auction process is becoming a common industry practice as it offers both the buyer and seller immediate results.

He says as the property auction industry develops, so the need for alternate lenders increases. As a result, Palmer says they have noticed an increase in property auction buyers turning to alternative lenders for asset-backed finance to buy or re-finance a property, land or development that is on auction.

Palmer says time is of the essence for investors attending auctions, as buyers need to know how much capital they have available, and need fast access to this capital. He says auction houses require a deposit and commission to be paid immediately, and usually the remaining balance to be secured by a bank guarantee within 30 to 40 days. “It can take up to three months to arrange this amount of capital from traditional lenders, which is far too long for buyers who have to abide by the auction houses’ stringent and contractually binding deadlines.”

He says they have seen an increase in the number of potential buyers approach Paragon for a facility secured by other properties in order to have the comfort of knowing that they have the facilities to buy at auctions.

He says the lengthy approval process of the banks due to tough lending criteria jeopardises the buying power of property buyers attending auctions. He says in order for buyers to have the peace of mind of knowing that funding is available when required, they need to ensure they have the facilities available to move on transactions in the quickest possible time without any complications. Alternate lenders understand that property auction buyers need to move quickly to secure transactions, or they will risk losing out on valuable deals. They are able to process applications quicker and provide clients that have assets available with financial solutions as well as a formal bank guarantee within seven days, he says.

“We have also seen an increase in the number of sellers at auctions seeking traditional bridging finance once their properties are sold at auction. Sellers can obtain up to 80% of the net equity in the property prior to transfer. This works well as the sellers can have immediate liquidity to buy other properties or to invest funds into their business.”

Palmer says investors should consider their options carefully before attending a property auction, and discuss their requirements with a finance specialist to determine the best way forward. Despite resistance from the banks, he says local property investors should not be deterred from securing finance for property auction sales against their assets, as they can continue to grow their business and increase their buying power which will allow them to buy more properties when opportunities arise. 

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