Minding the Gap with Bridge Finance
Many property professionals have a general idea about bridging finance, but just how it works and how it can be used to facilitate transactions and seal deals is often less understood. Here’s a closer look at what you need to know.
What is bridging finance?
Bridging finance is a financial service – a short-term loan – that bridges the time between when a transaction has been signed and when payment is made. It can be used in many situations but is most commonly used in personal-injury claims and property deals.
What is property bridging finance?
Property bridging finance is a service that allows property owners, sellers and estate agents to access their funds earlier in the process. The proceeds from a sale of a property or from a new or further bond become available to the owner, seller or estate agent only on registration of the transaction at the Deeds Office – a process that can take anything from 30 to 90 days, and occasionally even longer.
But many people need the proceeds sooner than this in order to pay deposits on their next property purchase, for paying relocation costs and transfer duties on their new properties or for other pressing expenses. For them, bridging finance can take the stress out of buying and selling (and is sometimes the only way they can afford the purchase of a new property) by helping eliminate the waiting period for funds.
Who needs property bridging finance?
Sellers can make use of bridging finance in order to pay relocation costs, arrear rates and transfer duties on their new properties. In many cases they have specific debt, such as school fees and consumer debt, which urgently need to be settled.
Buyers – if they are also sellers – can use bridging finance for the same reasons.
Agents, principals and licensees can also use bridging finance if they need advances on their commission.
How can bridging finance help secure a sale?
In many cases, buyers need to put down a deposit on their next property. If they are expecting proceeds from a current sale, they can access these funds through a bridging-finance company. Buyers often don’t realise the considerable costs associated with buying a property. Before a conveyancer can effect transfer of a property, the buyers will need to pay transfer duty (where applicable). If the buyers need to raise cash to do so, it can be bridged on the sale of their current property.
Sellers usually have to settle rates in arrears, while buyers have to pay rates in advance for the first few months. These costs can also be bridged on the sale of the property.
Personal injury claims are straightforward examples of situations where bridging finance is regularly used. Injured parties can often wait years before an insurance company pays out the claim that is due to them. During this time they can have substantial medical and living expenses (often their salary is also compromised as a result of the accident), so bridging finance, in a situation like this, is a loan against the security of the claim acknowledged by the insurance company, which they can use to cover expenses while waiting for the insurance payout.
How can bridging finance help the agent?
In addition to being a useful tool for buyers and sellers, bridging finance can also benefit estate agents. Firstly, in many bridging finance companies, agents, principals and licensees qualify for short-term credit, meaning that they can, through bridging finance, access their commission, or part thereof, before the transfer is registered at the Deeds Office. Secondly, many bridging finance companies offer agents, principals and licensees commission on the loan if they refer a client to them, so it’s worthwhile finding out which reputable companies offer bridging finance and building a relationship with them.
Why not turn to a commercial bank for a loan instead?
Transaction turnaround times in bridging finance are usually very fast, and commercial banks are not usually set up to deal with short-term loans, nor are their systems geared towards lending money quickly.
What should you look out for when applying for bridging finance?
There are quite a number of factors to be aware of when considering bridging finance. Andrew Church, chairman of the Bridging Finance Association of SA (BFASA) and CEO of Rodel Financial Services, offers the following advice:
• The BFASA regulates the behaviour of its members. An estate agent or member of the public should, first of all, deal only with reputable bridging finance companies and never deal with a bridging finance company that is not registered with this body.
• While certain legal firms offer bridging finance, they are almost never registered as authorised credit providers. Consequently, every year the Attorney Fidelity Fund receives claims from the public against attorneys who have engaged in bridging finance. Steer clear of attorneys who offer bridging finance, as they inevitably find themselves in a conflict situation where they are involved as a money lender and in a professional capacity as an attorney. And they very often flout the law society’s touting rules.
• While bridging finance companies, like most financial institutions, are prepared to pay referral commission, look out for bridging finance companies that offer referral commission to attorneys, paralegals and estate agents and then add that commission to the client’s costs. Borrowers are always entitled to know where someone is earning commission from their transaction.
• Bridging finance is a short-term transaction and accordingly is more expensive than normal banking rates. Bridging finance is also charged on a daily rate and therefore the term of transaction should be kept to a minimum. The shorter the term the cheaper the cost of finance, so you should always obtain bridging finance on the last day possible.
• Principals, licensees and agents are usually entitled to commission from bridging finance companies and this commission is usually split within the agency in agreed proportions.
• Principals and licensees of estate agencies need to take great care when signing any documentation around bridging finance as they can unwittingly incur liability for monies borrowed by their agents. Bridging finance companies usually contract directly with the agents rather than the agency, but a principal or licensee should always be required to consent to one of their agents taking a loan. Principals who are unsure of what they are signing should query the documentation with an attorney or with the bridging finance company itself.
• Buyers who haven’t been able to raise 100% of the acquisition costs of a property can apply to certain financial institutions for a personal or top-up loan. This is not bridging finance, but most bridging finance companies should be able to direct clients to suitable companies for this service.
Words: André Fiore