Marketing

How Do Auction Sales Work?

Commercial real estate auction sales differ somewhat from traditional brokerage sales. Here are some of the points that define the auction process and make auctions a popular alternative in today’s uncertain market.

The main advantage of auctions is the control they give property owners. Sellers set the terms, and all buyers bid to determine the price they will pay based on those terms. There is no asking price. But in an environment where the bidders will determine the final price, it is important to convey the opportunity for a wholesale price or the illusion of a bargain.

Possible offering strategies include a suggested opening bid at which bidding will start. In this format the seller either can accept or reject the prevailing high bid. Another approach is to publish a minimum bid reserve price; however, the seller is obligated to sell the asset at this price. This published minimum reserve price often needs to be substantially below the seller’s desired price in order to generate significant upward momentum of bidding. Finally, sellers can set no required price or hold an auction without reserve, accepting the high bid price at the conclusion of bidding.

Another advantage auctions give sellers is a specifically defined marketing time. Typically it is 60 to 90 days, with closing 30 to 45 days after the bid date. The auction or bid date sets a deadline by which buyers must act if they want the property. There are scheduled on-site inspection times, when all interested parties may see the property and other interested buyers.

All due diligence must be performed prior to the auction or bid date. The broker/auctioneer prepares a due diligence package which can range from 200 to 500 pages of information. Both the positives and the negatives of the property must be disclosed. Property can be sold as-is, where-is with limited seller warranties.

The purchase agreement is universal for all buyers bidding in the auction, with no further negotiations. A designated cashier’s check is required to bid and goes “hard” immediately. An additional deposit up to 10 percent of the contract price may be required upon acceptance by the seller.

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