Once thought to be a sales tactic best suited for distressed and hard-to-market properties, auctions are gaining ground in today's market as an efficient and effective disposition strategy. In fact, the National Association of Realtors estimates approximately 30 percent of all U.S. real estate will be sold via auction in the next 10 years. What's contributing to the rise in auction sales? A competitive marketplace is certainly a factor, but equally important is the growing role technology is playing in the marketing and sales processes.
Nothing has elevated the visibility of auctions in today's society more than the success of personal property auction sites such as eBay. Yet online auction sites have limitations when it comes to selling real estate and other big-ticket items. While many products are universal in scope, real estate is unique by nature. Properties vary in every way from location to size to income, and these factors do not always translate easily into an online format.
Despite this fact, the Internet continues to evolve as a tool in the marketing and selling of realestate at auction. For example, www.sheldongood.com generates more than 40,000 visitors from six continents regularly pursuing properties coming to market via auction. In a recent mixed-use property portfolio auction, more than 6,000 of 8,000 interested parties registered for the auction online. Bidders can sign up to bid online for open outcry auctions, although the vast majority of bidders still opt to bid in person. Online bidders can bid in real time either via posted printed bids, or by participating in live open outcry auctions that are audio and/or visual broadcasts over the Internet.
Additionally, technology can be an invaluable aspect of marketing and selling property via auctions. Online listing services, such as CCIMNet and LoopNet, provide vast exposure to potential buyers worldwide, creating an unlimited pool of prospective purchasers. Distributing due diligence materials and other pertinent documents via e-mail and online is another process that saves time and increases efficiency in the auction sales process.
Internet-based tools such as STDBonline play an important role in creating due diligence materials for auction properties and developing marketing distribution lists. In addition, the use of video, audio, and Web capabilities to simulcast auctions worldwide is increasing the viability of auctions as a mainstream sales technique.
Who's Using Auctions?
Sellers and buyers who use auctions today include institutions, investors, developers, corporations, real estate investment trusts, partnerships, individuals, banks, and government agencies, among others. The properties they sell and buy are just as diverse and range greatly in size and scope. Prime candidates for sale via auction are properties not easily valued on a traditional pricing matrix, unusual or special-purpose properties, portfolios of multiple properties, properties that require a sale deadline or controlled timing, and properties that require transparency. A few examples of sellers who are using the auction process to dispose of commercial real estate assets follow.
American Greetings recently sold a 770,000-square-foot distribution center in Arkansas and a 504,000-sf distribution center in Kentucky via auction. Both properties are located in predominately rural areas and were difficult to evaluate through traditional pricing matrixes. Because of their size and location, these sites were offered on a sealed-bid basis. In both cases, the auctions created a sale deadline. One of the properties actually sold before the auction - the buyer did not want to risk going through a competitive bidding process. The other center was sold after the auction to a buyer identified through the marketing process. Post-auction sales are often the result of purchasers who want to buy the property under slightly different terms than those set forth in the auction deal structure.
In another instance, a major manufactured-housing REIT offered 97 home communities in 15 states through a series of three live auction sales during a period of 18 months. The first sale was for 12 communities in five states, with 11 communities offered absolute. The second sale was for 14 communities in nine states, with 13 offered absolute. In the final sale, 71 communities in 15 states were offered, with 15 being sold on an absolute basis. As a result, more than 50 communities were sold for a total of nearly $200 million.
Both portfolios' geographic diversity and net operating incomes, which ranged from $100,000 to more than $1.5 million, made it necessary to distribute due diligence quickly. Once registered online at the Web site, nearly 3,000 prospective bidders were provided with an access code for the properties they were interested in pursuing. They were able to receive detailed due diligence packages in either hard copy or a downloadable PDF file and also were regularly contacted via e-mail and telephone for updated information during the marketing program. When auction day arrived nearly 1,000 prospective purchasers attended and bids received approached $250 million of property.
A Midwest regional manufacturing company wanted to sell two remaining parcels - 22 acres and 5.2 acres - of an original 150-acre tract in Denton, Texas, a rapidly growing area north of Dallas. The property had been listed with a major brokerage company that quickly sold two of the tracts and continued to market the remaining parcels. After 18 months of little action on the two remaining tracts, including an unsuccessful sealed-bid auction, the listing broker referred the property to Sheldon Good & Co. In conjunction with an aggressive marketing program, a minimum bid offering in a live-auction format resulted in nearly 100 calls, 30 bidder's information packages sold, and 12 bidders at the auction with the required certified check amounts to bid. After the auction was completed, bids of more than $1.3 million had been received. The sites closed in 30 days on an "as-is, where-is" basis and the prices obtained at the auction were nearly five times above the minimum bid prices.
Auctions' Growing Appeal
Each of these transactions illustrates different types of auction strategies each based on the specific characteristics of the property being offered. Every property and situation requires customization that takes into account the property's dynamics, the property's location, and the seller's objectives.
Today's commercial real estate auctions are certainly not what they used to be. All types of selling entities and properties are utilizing auctions, particularly for properties that are not easily valued and multiple-property portfolios. Auctions give sellers an opportunity to control the sale's timing and the offering format and generally help them achieve a fair-market sales price. Brokers and sellers should consider real estate auctions as a creative and alternative method for the sale of their properties.