The Auction Alternative
Discover How the Bidding Process Can Generate Profitable Deals.
Each year, auctions are used to sell
billions of dollars of commercial real estate. Once thought useful only
for disposing of problem and hard-to-sell properties, auctions are
gaining popularity as an effective sales strategy for all types of
commercial real estate.
Current market activity shows that
auctions are on the rise nationwide. For instance, the number of
industrial property auctions is increasing as companies divest
themselves of surplus space resulting from the volatile economy.
Regional malls, big boxes, and strip centers also are hitting the
auction block as a shakeout continues in the highly competitive retail
sector. Even multifamily real estate is garnering record sales prices
at auctions as investment yield rates fall and condominium conversions
drive up selling prices.
Auctions offer commercial real estate
professionals a viable alternative to traditional sales methods that
can benefit their clients and themselves. For example, brokers who
register prospects that prevail in the bidding process can earn
substantial fees, especially as the trend in traditional commercial
brokerage moves away from fee sharing. Referring specific properties to
auction companies results in immediate sales and subleases for clients
and referral fees for brokers. Also, by aligning with an auction
company, a brokerage gains professionally executed auctions without
having to develop its own auction division.
vary slightly for different property types, some general principles
apply to all auctions. By understanding auction fundamentals —
including how and when to use them — commercial real estate
practitioners can reap the benefits of this potentially lucrative sales
When Do Auctions Make Sense?
Common situational themes often portend when auctions are preferable to more-traditional sales methods.
auctions help define the market for hard-to-value properties. The
competitive bidding process garners premium sales prices for such
properties. In addition, if a property's market is thin, an auction can
accelerate the sale.
Auctions also are useful when a property
owner wants to control the deal structure. In an auction, the owner
sets the specific sales terms, and the market bids based on those
terms. The auction company prepares all of the financial, legal, and
other materials beforehand, including the real estate sales contract
that the prevailing bidder must sign. This valuable aspect of auction
programming is reassuring, particularly to owners who have had negative
experiences with contingency-laden contracts. Most auction deals are
made on an as-is, where-is basis and require potential buyers to
complete due diligence prior to bidding.
Another benefit of the
seller controlling the deal structure is that bidders have the
opportunity to offer alternative deals, including conditional bids
versus as-is bids. For instance, many times owners of vacant land must
choose between accepting a deal with zoning contingencies, which may
fall through, and only looking at deals offered on an as-is basis.
However, an auction company can structure the process so bidders can
bid both ways. Then the seller can choose between the bidder's offer
subject to zoning contingencies or a lesser, as-is, non-contingent
Auctions also allow owners to set and control a deal's
time line. This is a key advantage for owners who want to defer taxes
by selling a property and buying a replacement property in an Internal
Revenue Code Section 1031 exchange. Other times, owners seeking to sell
properties before year's end to offset gains and losses find the
ability to set the sale date and the transaction's closing date very
Owners of properties with negative cash flows also
benefit from controlling the deal's time line, especially if they
cannot recoup carrying costs incurred during a prolonged marketing
campaign by selling at a higher price. Most commercial property
auctions take place within 45 days to 75 days, with closings ranging
from 10 days to 60 days thereafter. The speed of these transactions can
translate into huge savings. For example, a property has a negative
cash flow of $20,000 per month and is expected to take six months to 18
months to sell. By using an auction, the owner can afford to discount
the sales price between $120,000 and $360,000 and still come out ahead.
Auctions also are used for vacant commercial real estate space
and surplus leases. Through portfolio sales, surplus properties are
sold individually and simultaneously, thereby maximizing each
property's sales price.
For example, an insurance company
wanted to sell a portfolio of 29 commercial properties located across
the country. Several auctions were held during a five-day span, and the
bids on each property remained irrevocable for three business days
following the final auction. This deal structure allowed the owner to
review all bids before selecting the buyers. Thus, if a particular
property achieved a higher price than expected, the owner had the
latitude to accept a lower bid on another property. All 29 properties
were sold for $30 million — with about 70 percent of the properties
selling on the spot at their respective auctions.
Choosing the Format
Stand-alone, portfolio sales, and multiple owner/multiple property are the three basic types of auction forums.
auctions are simply one property, one auction. All of the pre-auction
marketing is designed specifically for the property involved. The main
benefit of stand-alone auctions is that they can take place at any
time, but this is the most costly approach, since one property bears
all promotional expenses.
In portfolio sales, one owner offers
a number of properties for sale individually but at the same time. The
key to a successful portfolio sale is to treat each property as if it
is being marketed on a stand-alone basis to take advantage of economics
of scale that result from overlapping marketing opportunities.
instance, for a 300-property portfolio sale that spanned several
Northeastern and Midwestern states, many of the properties were
promoted jointly in local, regional, and national publications as well
as in two brochures that presented each of the properties individually.
These economies of scale offered significant cost savings and nearly
all of the properties sold as a result of these marketing efforts.
sales also allow owners to have the buyers in a given market bid for
each property simultaneously without giving a bulk sale discount; avoid
carrying costs that cause equity erosion; capture the market's
attention at the expense of competing properties; and control the sales
time line. The main drawback is the amount of cost savings achieved
depends on economies of scale that may or may not occur in marketing
the properties. Product type, geography, and scope of the market for
the variety of properties involved all affect the potential savings.
auc- tions are a hybrid of stand-alone and portfolio sales. In this
forum, an auction company assembles a portfolio of properties from
various owners to take advantage of economies of scale. The primary
benefit for properties in this forum is the large-scale marketing
opportunities at a significant discount. However, since the forum is
shared, sellers must accept a flexible time line determined by how long
it takes to assemble the properties.
Depending upon the
specific situation, any given property that fits an auction profile can
be a candidate for any combination of auction programs.
Types of Auctions
two types of auctions — open outcry and sealed bid — have several
subsets within them, and auction companies often mix and match the
Open outcry is commonly associated with auctions: An
auctioneer calls for bids in a public forum until the highest bidder
prevails. Open outcry auctions typically are used in the following
- The owner wants to sell the property on
predetermined terms, usually on an as-is basis with no contingencies
other than standard title, survey, and environmental matters.
are many potential buyers and the competitive bidding process most
likely will yield a fair-market price or even a premium in the case of
a highly desirable property.
- The property does not require lengthy evaluation to determine its value.
On the other hand, sealed-bid auctions are preferable for situations that combine the following characteristics:
- one bidder is superior to all others;
- a great disparity exists between the highest bidder's offer and second-highest bidder's offer;
- deal flexibility adds value;
- alternative bids are desirable; and
is not the sole consideration for accepting a bid, such as a case where
the second-highest bidder has more desirable credit than the highest
Several different methods within each category can handle these unique situations. They include:
reserve with no-minimum-bid auctions, for very desirable properties as
well as portfolio sales where establishing the owner's legal commitment
to sell the properties at potentially low prices may be necessary to
attract buyers in the marketplace;
- without reserve with a
stated-minimum bid, to limit potential bidders to only those bidding at
the top of the property's valuation range; and
- with reserve,
when the owner either is unwilling or unable to offer the property with
a binding minimum bid that is significantly below the target price. An
unstated reserve is when the seller's acceptable price is not made
public and generally is used when the owner's price expectation is a
range of value; if the bidding is in the range, the owner accepts the
bid. In a stated reserve, the seller publicly states the property's
price. This approach differs greatly from the minimum-bid approach in
that a stated reserve informs the public where the owner expects to
end, rather than start, the bidding.
estate auctions are gaining acceptance as useful sales tools in the
brokerage arena. The competitive bidding processes vary, but all have
proven remarkably effective in capturing markets and yielding premium
results. By participating in auctions, commercial real estate
practitioners can earn significant dollars for their clients and