Distressed Property Finance: 5 Funding Solutions for Distressed Assets

In finance, a distressed property doesn’t always mean one that’s in poor condition. The distress may arise from:

• Financial difficulties
• Time pressures and short windows of opportunity
• Property condition
• Legal complexities
• Issues regarding development status

Clifton Private Finance works with specialist lenders who have the experience and flexibility needed to offer comprehensive distressed property finance for individuals, landlords, and investors at different stages of property funding.

What Is Distressed Property Finance?

Distressed property finance is used when either the property or ownership situation is considered in need of support. It solves a range of funding challenges, often putting medium-to-large-scale funding in place at short notice for property owners that require a specific solution in a restricted time-window.

Depending on the circumstances, distressed property finance could involve one of several distinct types of funding:

• Bridging finance
• Auction finance
• Development finance
• Second charge loans
• Specialist mortgages

Traditional banks often have restrictions and underwriting considerations that limit the support they can provide for distressed properties, whereas specialist brokers and lenders have the expertise required to find a suitable solution.

With Clifton Private Finance as your dedicated property finance broker, you gain access to this wider marketplace of specialist lenders, providing you with the funding and support you need.

Key Scenarios Where Distressed Property Finance is Needed

Lenders offer distressed property finance tailored to your specific needs. The main situations that benefit from this specialist funding include:

• Repossession worries
• Bridging loans coming to the end of their agreed term
• Auction purchases
• Significant renovation projects
• Probate and divorce settlements
• Inheritance tax solutions
• Landlord exits
• Unmortgageable properties

1. Imminent Repossession or Mortgage Default

Borrowers who have significant arrears or have received legal notices of repossession from their current mortgage provider may have a very short period of time remaining to settle the outstanding mortgage in full or risk losing the home.

Distressed property finance allows you to refinance quickly, providing a short-term bridging loan to repay the existing mortgage lender before the property is repossessed. This gives you the time needed to either secure a replacement mortgage that is better configured to meet your circumstances, or put the property on the market yourself, controlling the sale to obtain the market value.

2. Expiring Bridging or Development Finance

When a planned exit strategy for either bridging or development finance falls through, distressed property finance can offer a refinancing solution, providing the time needed to reach the originally proposed exit, or to develop a replacement exit strategy.

This may happen because:

• The project ran into delays: Development and larger refurbishment projects have many variables to juggle. While much may be done in advance to provide a cushion and minimise the impact of problems along the way, lenders understand that even well-managed developments can experience troubles.
• Sale falling through: Bridging loans that were obtained based on an expected sale, or development projects undertaken with a buyer in place, may have a sudden need for refinance support if the buyer unexpectedly pulls out.
• Refinancing gaps: Pre-planned mortgages intended to exit the bridge in time may be delayed, forming a gap between settling the bridging loan obligation and the mortgage funding being in place. Distressed property finance can extend the bridge over the refinancing gap.

Using distressed property finance to provide the time needed for a new exit meets existing obligations, helping avoid any penalties and maintaining strong relationships with lenders.

3. Auction Purchases of Distressed Properties

Property auctions provide opportunities for investors and landlords to obtain houses at a discounted price, however, strict 28-day completion deadlines and property condition restrictions often mean traditional mortgages are a poor fit. Distressed properties can also be acquired through off-market deals and direct purchases from banks or receivers, not only at auction.

Distressed property finance, in the form of auction-specific bridging loans and funding designed for rapid completion, can effectively put you in the position of a cash buyer. This removes concerns with both timing windows and property condition, providing the power needed to make the most of property auctions and repossessed stock.

Bridging finance used for auction properties is based on a strong exit strategy, which is typically either:

• Refinance with a traditional mortgage for long-term monthly repayments
• Sell the property onward for profit (often after refurbishment)

4. Properties Requiring Refurbishment or Redevelopment

Banks and lenders’ mortgage regulations mean that a property must typically be considered habitable in order to be used to secure a mortgage - often this specifically means the house must have a working kitchen and bathroom. When a property is distressed and in a poor state of repair, it can become unmortgageable, making it almost impossible to obtain traditional long-term finance to purchase it or pay for the essential renovations.

For many buyers who have acquired a distressed property below market value, this restriction can present a significant stumbling block - one overcome by distressed property finance.

Specialist bridging finance can be used for distressed assets, providing the capital required for both its purchase and the subsequent refurbishment. This provides investors, developers, and those looking for a bargain home the ability to fund, renovate, and convert properties with structural defects, no plumbing or wiring, and those that have suffered fire or flood damage.

Refurbishing this type of property can uncover hidden issues, so buyers should allow a 15% to 20% cash reserve for cost overruns and to help turn the project into a viable investment. In some markets, renovate-to-own mortgages can also combine purchase and renovation costs into one long-term mortgage.

5. Probate and Divorce Disagreements

When there is a disagreement between multiple owners of the property, distressed property finance can help by giving one party the purchasing power to buy out the others, raising funds against the property to prevent a forced below-market value sale.

Often disputes between beneficiaries of a property-as-inheritance, or separating couples are best solved rapidly, making the speed of distressed property bridging an integral component to its effectiveness. The parties looking to exit the property, converting their equity immediately into cash, can have their needs met, while the owners looking to keep the home can achieve this aim. Over the long term, a mortgage can be used to refinance the distressed property finance, or the property can be sold at its true market value when a suitable buyer can be found.

6. Inheritance Tax Solutions

Even when the beneficiaries of an inherited property all agree on a desire to keep and maintain the house, inheritance tax obligations can put them into financial difficulty. Distressed property finance prevents the property from having to be put up for sale, providing the capital needed to pay the inheritance tax bill without delay.

Properly configured with a long-term refinancing solution, the bridging finance will greatly reduce the financial and emotional impact that can come from significant inheritance tax obligations, keeping the home in the family as part of a continuing legacy.

7. Landlord Exit and Property Company Portfolio Restructuring Finance

Distressed property finance can offer landlords several additional options, lifting the stress that can come from difficult solutions. With well-managed finance, landlords can:

• Sell tenanted properties: It can take longer to market homes with problematic tenants in situ, and landlords may feel forced to continue a situation that’s no longer desirable until current contracts come to an end and the tenants vacate the home. Distressed property finance can release the capital locked in the property, giving landlords options while a suitable buyer and replacement landlord can be found, or until the current tenants move on.
• Refinance a buy-to-let portfolio: Professional landlords, including those who have incorporated, looking to reduce or otherwise refinance their portfolio may look to distressed property finance to provide the flexibility required.
• Equity release: Capital tied up in properties can be released with distressed property finance, providing the funds needed for refurbishments, additional property purchases, or other investments.
• Execute bridge-to-sale strategies: Maximising the market value of your properties can mean engaging in necessary repair, renovations, and refurbishment, as well as waiting until the market conditions are favourable and the right buyer comes along. Bridge-to-sale strategies offer a flexible timeline, providing significant capital upfront to pay for costs while offering the time needed to maximise property value.

5 Types of Distressed Property Finance

A comprehensive distressed property finance solution may involve multiple funding solutions, often developed to be employed in sequence as the circumstances improve. At Clifton Private Finance, we work with you as your partners throughout the full cycle of the project, moving from the need for immediate finance to a long-term solution that provides ongoing stability.

1. Bridging Finance

Specialist bridging finance often forms the core of distressed property finance. As a powerful and flexible solution, bridging loans employ different eligibility criteria to mortgages, making them more suitable to help in more complex situations.

However, bridging finance is a short-term solution, that can only be obtained with a well-planned exit strategy in place. Broker support and expertise is essential to secure a bridging loan as most lenders do not offer products directly to the public.

Bridging finance has several specific qualities:

• Loan sums determined by property equity: Bridging loans are secured against the distressed property as the main collateral, but may also be boosted through additional property securities. If you are looking to use distressed property finance on a secondary property then your primary home can also provide additional equity leverage, boosting the size of the loan available.
• No monthly repayments: Bridging loans are settled with the final exit, with no monthly repayments required during the term. Some structures may offer optional monthly payments to service interest where desired.
• Alternative approval criteria: With property securities the main consideration, lenders put less emphasis on personal credit histories, making bridging finance possible where a traditional mortgage application has been rejected.
• Rapid approval process: Lenders understand that bridging is often used where time pressures exist and the underwriting process is structured to be fast and effective. In some cases, bridging loans can be approved and the cash available within days.
• Short-term lengths: Bridging finance is defined as that which bridges between a current need and a future solution, and is not meant as ongoing funding support. Term lengths are typically 12 months or less, with some specialist bridging possible for pre-defined projects that are expected to take longer, up to 24 months.

2. Auction Finance

Auction finance is a subset of bridging finance specifically tailored to suit the needs of those buying property for sale at auction. With a focus on fast approval, auction finance ensures you can bid on auction properties with confidence, secure that the financial backing exists to meet the strict 28-day terms of property auction houses.

Distressed properties sold at auction that require renovation can often have refurbishment costs folded into the auction finance, such that it provides the means to purchase the property as well as bring it to a modern standard for investors who intend to refurbish and later resell.

Investors looking to refurbish and flip properties often use auction finance to provide the funds necessary to take the project to completion, using the proceeds from the property sale as the exit and aiming for a higher price on resale or refinance.

3. Development Finance

Development finance is larger-scale, staged funding that allows investors to purchase land and distressed properties as an investment tool for larger refurbishment, conversions, and ground-up projects. Developing or refurbishing a distressed property can add value before refinance or sale.

By providing the funds needed at predefined checkpoints, development finance reduces the interest burden while still ensuring that project has the significant capital it needs.

4. Second-Charge Mortgages

A second-charge mortgage is a secured loan that sits alongside your existing mortgage, providing funding for renovations in distressed properties without affecting the current mortgage.

It is a suitable option for secure homeowners looking to bring their distressed home to a modern standard. However, the criteria for a mortgage, including the property having a working kitchen and bathroom, will typically apply.

Second charge loans also allow property owners to release equity from an existing property to purchase a distressed asset, providing liquidity without disrupting existing mortgage arrangements.

5. Mortgages

Mortgages and remortgages form the core of property refinance, typically used once the property and circumstances have been stabilised and long-term finance is wanted to exit any bridging loan.

While a mortgage for a distressed property may be difficult to obtain in the first instance, once refurbishments are complete and the property is no longer considered distressed, standard mortgage criteria are more easily met.

Examples of distressed property finance moving to a final mortgage include:

Fear of Repossession Due to Financial Difficulties

• Distressed property finance pays off the existing mortgage, removing the immediate pressure and threat of repossession.
• Specialist mortgage lenders are approached, including those who focus on bad credit mortgages.
• A new mortgage application is made.
• The new mortgage settles the distressed property finance bridge.
• A new structure of monthly repayments for the stable mortgage is in place.

Repossessed Property Purchased at Auction

• Distressed property finance provides fast finance to secure the property at below-market value.
• Time is provided by the bridge to complete the longer process for a traditional mortgage.
• The new mortgage settles the distressed property finance bridge.
• Long-term repayments are made for the new mortgage.

Distressed Property Purchased at Auction

• Distressed property finance provides rapid finance to both purchase the property and provide funds for renovations.
• Property is refurbished over several months.
• Property is restored to a mortgageable condition.
• A new mortgage is obtained.

One Party Buys Out the Other After Divorce

• Distressed property finance provides funds needed immediately to buy out the second party.
• The second party is satisfied and pressure is removed.
• The bridge provides time to secure appropriate long-term finance.
• A remortgage is obtained that replaces the existing mortgage and repays the distressed property finance bridge.
• Monthly repayments are made for the new remortgage.

What Lenders Look for with Distressed Property Finance Applications

Applicants seeking distressed property finance should consider lender requirements to maximise the chance of approval.

• Property value: Distressed property finance is primarily secured against the property and its current market value is a key consideration. For funding intended for renovation or development, the property’s gross development value (GDV) or predicted final market value may also be evaluated. Bridging finance may also be secured against other existing properties, supporting the application with additional asset-based collateral. Lenders will undertake an independent valuation of all relevant assets prior to finalising any loan application.
• Saleability: The size of the market for a future sale is also taken into account. Niche properties with a smaller pool of potential buyers may be more difficult to finance, with higher rates and a more limited range of suitable lenders.
• Your exit strategy: Most distressed property finance is exit-based, structured for repayment in full once the exit condition has been met. Typically, this will be through refinancing with long-term funding, such as a mortgage, or through the sale of the property. Having a clear and well-defined exit strategy will improve the chance of approval.
• Your market experience: Developers, landlords, and investors looking to flip a property should include your relevant experience in the proposal. Lenders will have more confidence in funding applicants with a proven track record, leading to a greater number of successful applications and potentially more competitive rates.
• The project’s legal standing: If relevant, the legal situation, including any planning requirements, regulations, or licensing, may have an impact on the application.
• Your credit history: While distressed asset finance can often look beyond a poor short-term credit report, a strong credit rating will help support your application.

At Clifton Private Finance, our experienced team will conduct a thorough pre-approval process, evaluating your application using similar criteria to the lenders, and helping you make adjustments as necessary. This vital service greatly improves your chance of a successful application and reduces the potential impact on your long-term credit report.

Why Properties Become Unmortgageable or Fall Below Market Value

One of distressed property finance’s uses is to leverage the property for finance when it is otherwise considered unmortgageable, funding repairs, solving complications, and repositioning the house for a potential future mortgage or sale.

High-street banks may reject properties because of:

• Structural issues: Distressed assets may have significant structural problems that prevent the property being habitable. Until those problems are resolved, traditional routes to finance are typically out of reach.
• Short lease: Leasehold flats and similar homes can become unmortgageable when the remaining lease is under 85 years. As the lease shrinks, the number of lenders reduces accordingly, with very few lenders willing to consider properties with 60 years or fewer remaining.
• Non-standard construction: Homes of non-standard construction, such as cob houses or houseboats, may stand outside typical mortgage criteria. Distressed property finance can be used to secure those homes, providing the time required to secure specialist long-term refinancing.
• Tenancy complications: Homes with tenants in situ have a far smaller pool of potential buyers, especially if there is evidence of difficulties with those tenants, and may become unmortgageable. Using distressed property finance, landlords can release funds for legal support as well as creating a potential sale window.
• Legal issues: Difficulties regarding the legal status of the property, or other title issues, can make securing finance more complicated. For example, title issues can arise from hidden liens or unpaid property taxes on foreclosures that must be cleared before ownership transfer. Distressed property finance can be used to cover expenses and provide liquidity while resolutions are found.

How Acting Early Can Improve Your Options

With distressed properties, and when opportunity windows are a significant component to the situation, acting without delay can often greatly improve the outcome and the options available to you.

Prevent Properties Becoming Unmortgageable

While it may be preferable to get a traditional mortgage if possible, even when that isn’t the case, the number of lenders willing to support an application for bridging finance will be greater and the rates potentially lower, when the property is in a mortgageable state.

Renovation and repair costs may be reduced when essential works are done earlier, and in many cases, preventative repair can stop otherwise-catastrophic events.

Being aware of the issues that can create unmortgageable properties will also help, preventing alterations that are may impact negatively in the future.

For leasehold buildings, mortgaging or selling on before the lease drops below certain thresholds will increase the options available.

Secure Opportunities at Auction

Buying below-market value at auction is made easier with a funding partner alongside, ready to provide the capital in time to make the purchase. Repossessed properties are often found at auction, with the financier focused more on a quick sale than achieving full market value.

By securing your finance early, you will be able to seize more auction opportunities and time-sensitive property bargains.

Avoid Repossession and Bankruptcy

Repossession is an extremely high-stress and undesirable situation for homeowners. If you are in a period of financial difficulties, seeking help sooner will result in a greater number of options.

Once distressed property finance ensures you meet your current mortgage repayment obligations, options for either refinancing or sale will help transform your future prospects - you may profit from a sale at full market value, or achieve financial stability with a new remortgage.

Here, acting early can be the difference between a continued happy homelife and a stressful repossesion, potential bankruptcy, and years of ongoing financial difficulties.

At Clifton Private Finance, our team’s expertise can secure you the most appropriate funding, giving you the time you need to stabilise.

Distressed Property Finance with Clifton Private Finance

With Clifton Private Finance as your partner, you can get the distressed property finance you need to solve the complex challenges presented by distressed assets or financial difficulties.

As an experienced bridging and mortgage broker, we have access to the full UK marketplace of lenders and can quickly match you to the right specialist lender for your circumstances. Our services include:

• Expertise and support throughout the process
• Funding to meet auction deadlines of 28-days
• Finance to prevent repossession
• Fast funding to ease divorce settlements
• Bridging finance for refurbishment projects
• Exit finance for large-scale developments
• Supporting finance for complex landlord situations and portfolio management
• Bad credit mortgages

To discuss your specific circumstances and explore the options available to you with distressed property finance, and how Clifton Private Finance works with clients seeking tailored funding solutions, book a free consultation with a Clifton Private Finance adviser today.