The eBay Effect
Technology helps increase the audience for commercial real estate auctions.
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
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
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
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.