How Do Real Estate Auctions Work?

Posted May 6, 2022

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When you hear that something is being sold at auction, you may assume it’s in foreclosure or otherwise distressed, but that thinking is old-fashioned and inaccurate. Auction sales for commercial property have become increasingly popular and, in some cases, may be more expedient and could potentially bring in a better price than a traditional sales approach.

The National Association of Realtors (which represents brokers for both residential and commercial property) cites these advantages of selling via auction:

  •       Elimination of prolonged negotiations
  •       Creation of urgency for potential buyers
  •       Typically reduces the time required to sell and close
  •       Eliminates artificial ceiling on sales price
  •       Allows the seller to set the sale terms in advance

According to Joseph Cuomo, head of marketing for leading online auction site Ten-X, selling via auction can reduce the transaction calendar to less than 100 days in some cases, which is noticeably shorter than the average timeframe for a traditional sale. One reason for the efficiency is that the due diligence is typically completed before the auction, and potential buyers are offered a tremendous amount of information about a property. Plus, once the interested parties are known, they need to be qualified as buyers, which saves time once a winning bid is identified.

What Is the Process for an Auction?

First, the seller will decide whether to use an online auction (more common for commercial property) or a live auction and engage a professional to facilitate the transaction. The auction company will assist the seller with the necessary preparation, particularly the marketing. Many commercial property auctions have a reserve price, meaning the seller has set a minimum bottom line amount. If there are no bids at or above the reserve price, the sale will not go through. This tactic can be helpful if an unexpected event occurs that disrupts the market in a way that could lead to an unreasonably low offer winning the auction.

On the auction day (or during the specified period, in the case of an online sale), buyers bid after registering and being qualified. Typically, the highest bidder is expected to sign the purchase agreement on the same day, and the deal could close within forty-five days of the auction’s conclusion. The buyer is buying the property “as-is” unless otherwise specified, so one considerable advantage to the seller is that they don’t need to worry about losing the sale following an inspection.

Does it Make Sense to Auction my Commercial Property?

The decision to auction rather than sell traditionally depends on several factors, including the seller’s motivation and timeline, not to mention their patience with the process. Ten-X vice-president Victor Gutierrez reports that hospitality property is ideally suited for auction and that multi-family property is also a big seller, particularly if the asset is due for repositioning or upgrade. He adds that smaller, noninstitutional investors are more likely to buy property using an online site like Ten-X (owned by real estate information company CoStar). 1

Another expert in the strategy, Tyler Hague of Collier International’s Multifamily Advisory Practice, commented that the “certainty of execution is probably the number one reason to auction a property.” 2 Hague also notes that the competition among buyers can result in a higher sales price, although that’s never certain.

If the market is tight on inventory, an auction may be a promising approach for consideration since competition may result in a higher sales price. Sometimes unique properties also benefit from the auction option, as do assets that may be difficult to appraise.

Sources:

1. loopnet.com

2. colliers.com

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.

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