When the auction platform first emerged in the early 2000’s, most of the commercial real estate auction volume was from banks that had foreclosed on properties and wanted to quickly liquidate the assets in bulk. As the flood of foreclosed properties has become a trickle, auctioneers, such as Auction.com have shifted their sights to sellers who have equity and want to sell vs. having to sell.
My former colleague wanted to assess my interest in the platform. I have now referred two potential transactions to him and have become conversant with the concept. What follows is a review of the mechanics of auctioning your commercial real estate.
Factors determining success. Your success in auctioning your commercial real estate will depend upon the type of commercial real estate you are auctioning and your pricing expectations. If you own a vacant parcel of land in Barstow, chances are slim that the auction process will generate enough buyer interest. Conversely, if you own a partially leased office building in Costa Mesa, the auction platform will focus buyer interest upon your building and in many cases generate a higher price than otherwise would be achieved by conventional marketing means. The auction platform allows you to set a reserve price – a minimum price at which you are willing to sell.
The process. The auction company will assess the market value of the commercial real estate based upon a quick review of comparable sales and comparable availabilities. A value range will be given to the potential seller. If this range meets with the seller’s pricing expectations, a reserve will be determined, and the auction company will be engaged to conduct the auction. The auction company fronts the cost of an environmental report and a property condition assessment. Auctions are conducted every two weeks on Wednesdays. The marketing process is 58 days, the auction two days, and the close 30 days thereafter. The entire process, soup to nuts, takes 90 days. The seller pays nothing to the auction company. The auction company seeks its compensation from the buyer – generally 5% of the sale price. Interested parties are directed to a document vault where all of the due diligence is housed – environmental reports, property condition assessment, leases, preliminary title report, etc. Interested parties are required to sign a confidentiality agreement. Interested parties that become bidders are required to post a bidding deposit – generally $10,000 that is applicable to the purchase price if they are the winning bidder. Bidders agree to execute a purchase and sale agreement the day they become the winning bidder and to close in thirty days. At the point the winning bidder signs a purchase and sale agreement, the winning bidder has money at risk and cannot walk away without penalty.
My take, positives. The auction process focuses buyer interest very quickly. Engaging a good auction company will expose your commercial real estate globally – to as many buyers possible. Normally, marketing occurs, a buyer or two is procured, an escrow is created and you wait with crossed fingers while the buyer figures out if he can buy the building or if he wants to buy the building. Auctioning your commercial real estate removes the if and only delivers qualified buyers that can and must perform if they win the bid. In effect the old model of selling commercial real estate is reversed – all of the investigation occurs before an escrow for the purchase is created. The buyer is committed.
My take, negatives. Auctioning is expensive. The buyer pays a 5% fee to the auction company and the seller normally engages representation for showings, tours, and market expertise – and pays another 3-4%. Currently, there is limited allowance for a buyer to secure financing. A seller can sell the property out of auction, but if he does, the buyer fee of 5% is paid by the seller – a fairly harsh cancellation penalty.
Conclusion. Auctioning is something to consider if you are selling a partially or fully leased commercial building. Your commercial real estate will be exposed to the broadest market. If your goal is to sell your commercial real estate to an owner occupant, auctioning is not the best avenue – currently. But, stay tuned. The process will evolve and is worthy of a look in the future.