FEATURE ARTICLE, JANUARY 2006

GOING ONCE, GOING TWICE...SOLD!
Industry experts reveal the many advantages of commercial real estate auctions.
Lindsey Walker

Holding public auctions to sell properties has become a growing trend in the commercial real estate industry. No longer associated with just foreclosed buildings or bankrupt property owners, real estate auctions are catching on across the nation because of the fair playing field and competitive atmosphere they can create for buyers.

“In today's fast-paced society, it is no secret why auctions have become so popular,” says Rob Strickland, vice president, real estate, of Knoxville, Tennessee-based Furrow Auction Company. “While auctions were once considered a last resort for disposing of distressed property, they have now entered the mainstream as a viable alternative to the traditional brokered sale. The increasing popularity of this method of sale can be attributed to one simple proven fact: auctions work. Both buyers and sellers have begun to realize why auctions are win-win situations for all parties involved.”

One of the ways that auctions can benefit both buyers and sellers is by establishing the true market value of a property. “An open public auction is without a doubt the fairest way to establish value,” says Jim Owen, Texas division manager for Lakeland, Florida-based Higgenbotham Auctioneers International. “It is well promoted so anyone and everyone who has an interest can be on hand auction day to bid their judgment. Thus, auctions are indeed in their purest sense the best way to establish true market value as sales prices are established by open outcry competitive bidding.”

Tim Dudley, vice president of the real estate division with Richmond, Virginia-based Motleys Auction and Realty Group, agrees that an auction's competitive nature can benefit both the buyer and the seller. “In a market that is going up, an auction creates a competitive atmosphere for people to be able to bid on a property on an even playing field,” Dudley says. “During the last 5 years, real estate has been raising at such a high price that you'll hear people say ‘I'll offer over list value what they're asking for the property.' Well, with the auction side of it, they are able to do that in an open forum. We're able, in this type of market, to achieve the listing price and then some because of the competitive atmosphere we put people in.”

For example, Sperry Van Ness/Fisher Auction Company teamed up with several subcontractors and was selected to auction the former State Psychiatric Hospital in Northville Township, Michigan, approximately 20 minutes away from downtown Detroit. Previous attempts to sell and close the 414-acre site, which was owned by the state of Michigan, had failed, and environmental, development and public relations concerns had made the property difficult to market. “Bottom line, responses from more than 20 different states and countries indicated interest in the sale,” says Louis Fisher III of Sperry Van Ness/Fisher Auction Company. “Twenty-five bidding entities bought a property information package for $150; 22 people toured the facilities; and there were eight broker registrations. After the dust settled, the property sold for $31.5 million — representing fair market value determined by an appraisal.”

“The auction process is not only the fairest competition around,” Fisher says. “But, it also provides for the best possible appraisal of the property's value under the terms of the offering.”

Planning an Auction

In order to plan a successful auction, it is essential to know the history of the property and its owner, Strickland says.

“Once I know and understand the owner's outcome expectations and the purpose behind their need to sell, we can decide on the proper action needed to make it happen,” Owen says. “This can be more important than the property itself; if a seller if motivated, they will be very realistic on price expectations. An experienced auction consultant will know they can have a successful auction before even inspecting the property if they have a motivated seller.”

Creating a customized advertising plan for each property is another important aspect of real estate auctions. “We look for that uniqueness of the property that we can rifle-shot after,” Dudley says.

Owen agrees. “The advertising campaign is critical,” he says. “If buyers don't know about the auction, they can't be there.” A few advertising methods that auction groups utilize include signs, brochures, newspaper ads, press releases, trade journal ads, Web site postings, email blasts and telemarketing.  

Challenges

Educating and gaining the trust of both the buyer and the seller are two of the main challenges facing an auction company, according to Strickland.

“It goes back to the buyer and getting the buyer's expectations in line with where the market is really at,” Dudley says.

Determining where to hold the auction presents another dilemma. “Location is always a challenge,” Owen says. “Do we conduct the auction at the property or off-site? Our desired method is to be on the property. If we can't do an on-site auction, we elect to conduct it from a hotel meeting facility, but we want to be as close to the property as possible for last-minute inspections. Inspections themselves are challenges, but we always make a property available at specified times for inspection and have a knowledgeable person on-site to answer questions.”

Pros and Cons

With the growing awareness and acceptance of public auctions as a means to market a real estate property, the drawbacks to this method are becoming fewer and farther between.

“Because of Ebay being more and more in people's living rooms today, the word ‘auction' is no longer a bad word meaning that someone is in trouble,” Dudley says.

Instead, the word ‘auction‘ is becoming associated with someone making a financially advantageous decision to sell a piece of property. “Truth is, when people market their real estate at an auction, they are making a sound financial decision that is made more and more by major Fortune 500 companies who certainly are not in financial trouble,” Owen says. “Their advantage is they are attracting as broad a potential buyer pool as possible, thus enhancing their chances of getting the very best price possible in the shortest time possible.”

Lack of total control, on both the buyer and seller's part, is another possible drawback, according to Strickland. However, even with that fact in mind, the advantages — ranging from an accelerated sale to an enhanced marketing program to reducing and/or eliminating carrying costs — outweigh any potential disadvantages.

“When one really understands the auction process, there are few drawbacks to address,” Owen says.

Looking Ahead

With all of the momentum going forward, auctions are set to become even more popular in commercial real estate in the coming years.

“One thing that is certain is selling real estate at an auction is on the increase,” Owen says. “I predict that as the popularity of selling real estate at auctions increases, we will develop larger auction events.”

According to statistics from The National Auctioneers Association, everything from the number of members to gross revenue has increased in the auction industry.

“The National Auctioneers Association reports a 10 percent increase in members during the last 5 years,” Strickland says. “Gross revenues during the first three quarters of 2005 increased 4.75 percent from the same period in 2004. If this trend continues, the auction industry will have contributed more than $227 billion to the economy in 2005.”

In light of these trends, auctions should play a significant part in real estate transactions in 2006.

“Because of the way people have been doing their auction sales, auctions are becoming a tool for both real estate agents and commercial professionals,” Dudley says. “Real estate is starting   to grow at a very rapid pace.”

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