Auctions have been around a long time. It’s been said that auctions are the second oldest profession, I’ll let you assume the oldest? For commercial real estate, auctions can sometimes be an effective method for creating excitement and generating interest among new potential buyers.
I recently had a chance to quiz Scott Schwartz, president of Commercial Auction Group with Bull Realty on the Commercial Real Estate Show. He shared lots of wisdom and experience about this unique selling method. Scott has conducted auctions for 25 years and helped over fifty owners auction commercial properties last year.
An auction sale makes the most sense for an urgent situation. If an asset has been on the market for too long, it’s at risk for neglect, decline and even vandalism, plus the owner’s costs just keep adding up. That usually makes the situation worse. Auction is a great way to sell on deadline. Properly marketed and conducted, an auction forces a sale, and by extension, a closing.
Scott gave an example of a seller who has a backlog of property taxes. “If we go to auction on Tuesday, we can be closing a week later. There is no faster way to solve the problem.”
Additionally, an auction creates a new urgency, and gets new buyers to look at the property. “An auction sale injects a new psychology.” Scott told me. “Nobody comes to an auction with the idea: ‘Hey, we’re going to pay retail!’ We all know what’s happening: good old-fashioned greed kicks in, and buyers think they’re going to get a deal. That’s how an auction generates excitement.”
Ironically, this sometimes results in a higher than expected price. The better the marketing and style of the auction, the more ‘buzz’ is created, and that brings out the bidders.
Is Auction Right For You?
Auction is a creative selling tool that can shake up the market’s perception of an asset. Properties with expired listings may be the ideal candidate. If a listing is aging, a seller may want to consider auction as a means to refresh interest in the property.
In fact, if a broker can identify a listing that isn’t moving according to plan, Scott said he or she can come to us before it goes completely cold. An auction firm can provide that ‘second opinion’ that helps the seller see a way to lower their price and get it moving again.
Scott said that lately he’s seeing quite a number of owners who were caught in the downturn. These were folks who were ready to retire five or six years ago, but were unable to sell at that time. Now that the market is looking better, they’re that much older and even more concerned about cashing out in a timely way. Now it’s more valuable to get the property sold and move on than to wait for the ideal buyer.
Properties with cash flow potential work best at auction, as opposed to land or other long-term appreciation assets. Auction buyers like anything that can theoretically ‘make money the next day.’ Rehab it, get tenants in, and generate cash flow to hold or resell. A bidder likes to see a clear game plan.
Types of auctions, best practices.
During our show in August, we held an auction for a signed Hank Aaron baseball, and ran it on Twitter. We were raising funds for Atlanta Children’s Healthcare. Which led me to ask Scott, aren’t most auctions today online? Does anyone still bid in person?
Scott said that for large commercial assets, the best way to get the highest possible price for a property is to conduct a combination on-site auction with a concurrent live webcast for out-of-town bidders. The classic real estate auction we think of, where you show up, tour the property, and bid during a live auction, still happens. “Bidders certainly like to stand toe-to-toe with their competition and look them in the eye. We all like to see the crowded bidding scene.
But it makes more sense to additionally reach out using technology to reach buyers around the country and even around the world.”
Some assets are sold online only. This method is most suitable for those properties that are very remote, not too pretty, or have a very thin market of just a few bidders around the country.
What Sellers Need to Know
Because every deal is different, when you hire professionals like the Commercial Auction Group, they take a good look at your asset and develop a unique plan to convey the best message, and the best style of auction.
The costs associated with auctioning commercial property fall into two categories: the marketing budget, which can range from five hundred dollars to $50,000 depending on the asset and its potential buyer type, and the Buyers Premium, which is a percentage of the sale price. Every commercial auction is a unique event. An auction firm can’t really give you pricing (or at least they shouldn’t) until they have done a thorough evaluation of your property and situation.
What do Bidders Need to Know?
Successful auction buyers make quick, smart decisions. As a buyer, the due diligence period begins when you hear about the auction. How much should you invest in the due diligence? At my brokerage firm we have been engaged by note and property bidders to provide anything from just basic market information, to full blown detailed market, lease, tenant, demographic, environmental, property condition assessment and projections. The larger the price, risk and profit potential, the more research is called for.
You want to exercise control at the auction. Scott’s advice is to establish your maximum price, and do the best you can to stay within your goal. Of course, the auctioneer’s goal is to get you to exceed your price and bid a few more times!
Scott was very helpful demystifying on aspect of auction psychology where buyers and sellers may be at odds: the reserve, should the auction be absolute or have a reserve. An auction without reserve pricing is called ‘absolute.’ The asset will be sold to the highest bidder, no matter what that price is. Ironically this can bring the highest sales price, because bidders love it, and you get more bidders to the competitive buyer table.
Sellers can get nervous about an absolute auction, so Commercial Auction Group will sometimes set a reserve. But the job is to get the property sold and closed, and so the auctioneer may not publish the amount of the reserve. Buyers really need to know that the seller is serious. If a buyer thinks there might not be a sale, due to a high reserve, you may lose them. You want as many bidders as possible.
Time and again Scott said, he’s seen a seller swear he will not sell for less than X, only to receive a serious bid for 80% of X on auction day, which proves to be the best offer. “If we had published the reserve, that buyer may have stayed away.”
Tasty Frogs and Performance Art
“How much do you think it will bring?”
“That’s the toughest question I get from sellers when they first call, because I can’t answer it quickly. In this business we’re often the last resort. People are pushed by circumstance, tired of maintenance, or in over their heads. Sometimes we have to deliver bad news.”
Scott Schwartz really believes in helping people get the best they can out of a difficult situation. He shared this important advice:
“It’s like this: If you have to eat a frog, don’t stare at it too long.”
Scott continued. “We have to be boldly honest in this business. Auction is not for every property. But it can often give you the best result, because there is nothing like it for creating excitement and competition. Auction brings a sense of urgency and the potential for surprise.”
That sounds a lot like show business. And in a way, selling commercial real estate is very much a performance art. We set things in motion, and make them look good in the spotlight, but what happens next is up to the players.
“A good auction firm can get everyone on the same page, and get the job done. That’s the beauty of it.”