FEATURE ARTICLE, OCTOBER 2006

MAKING A BID
Auctions offer a quick and competitive way to sell commercial real estate property.
Lindsey Walker

Commercial real estate auctions — once associated with foreclosed properties and bankruptcy — no longer carry the stigma of the past. In today’s marketplace, auctions are a way for owners to sell their property quickly and effectively — and oftentimes at a higher sales price. With the auction on a set date, there is no long wait period wondering whether or not an offer will come to the table. Instead, all interested parties gather at the auction, a price is determined and the property is sold — all in one day. In addition to expedited closing time, there are savings with carrying costs, greater exposure to the market and a more competitive playing field. With all of the advantages, why aren’t auctions more popular?

Auctions are not for the faint at heart, according to Kay Zavala, development officer and operations coordinator with Tranzon Hanley in Fort Worth, Texas. Even though the sellers determine the day and time that their property will be sold, anticipation and the unknown tend to cause anxiety, Zavala says.

One factor that leads to this anxiety is the fear that the auction may not produce a high enough price. However, the key to combating this is through motivation. According to Zavala, the more motivated and eager the seller is, the more likely an auction is to succeed.

“Prospective buyers usually will not show interest unless they know that the seller has a compelling reason for selling,” Zavala says. “Also, property with high demand will sell for more at an auction than in a typical negotiated transaction.”

It is this demand — coupled with an open, public setting — that allows auctions to create a competitive atmosphere, which is conducive to obtaining a higher sales price. By generating competitive bidding and maximum exposure to the marketplace, auctions are able to obtain the true market value of a property, according to Timothy Clay, president of Clay & Company in Houston.

Zavala agrees. “Only when all current demand is revealed can a seller have the best opportunity to sell to the one buyer willing to out pay all others,” she says. “When demand is concealed, true market value cannot truly be determined.”

In addition to creating a fair and competitive playing field, auctions benefit from their fast time line, which, according to Zavala, can increase the liquidity of a property. “When real estate practitioners need to act fast, they are finding auctions to be a viable solution by which to dispose of their properties,” she says. “An auction allows the seller the ability to determine exactly when the property will sell and the terms by which the deed will be conveyed.”

Since a successful auction is contingent on its exposure in the industry, a well-designed marketing strategy is essential. “An experienced team of experts with regional and national market knowledge, buyer familiarity, marketing skills and a comprehensive understanding of the specific property type should select an auction strategy based on the seller’s objectives the uniqueness of the asset and current market conditions,” Zavala says. “Terms and conditions should be identified as to not deter serious buyers while minimizing the risk of default and tailoring the conditions of the transaction to achieve the seller’s goals.”

Identifying and accessing potential buyers is a critical component to the marketing plan, which typically includes direct mail, display advertising, web site exposure, e-mail distribution, on-site signage and telemarketing.. “Having a good mailing list and database of buyers is key,” Clay says. “Make sure you allow yourself enough time to penetrate the market, and target your marketing toward buyers/investors.”

When targeting potential buyers, Zavala advises against solely pursuing those with interest in the property’s current use. “Traditional theories for selling real estate do not always yield the highest price,” Zavala says. “Offering a property to buyers only interested in its current use may impose limits on its value, whereas a buyer with a different vision or passion may pay more for the property.”

If an auction firm does its job of advertising the properties and providing good due diligence packages to prospective bidders, the auction should be successful, according to Clay. “Having an absolute sale or an attractive reserve price bring qualified buyers to the auction,” he says.

Although auctions have become a more recognized method of selling commercial real estate in recent years, many owners hesitate to accept a “new” method of offering property on the open market, Zavala says. “Many buyers and sellers correlate auctions to ‘firesale,’ even though our experience indicates that auctions have realized more than appraised value and previous listing prices.”

Despite these drawbacks, Zavala is optimistic about what the future holds for the auction industry and commercial real estate. “Since 2001, the Tranzon Companies has experienced a 106 percent increase in the number of properties offered at auctions annually,” Zavala says. “Real estate auctions are here to stay and will continue to grow. There are more professionals promoting auctions than ever before.”

Clay also believes the industry is on the rise. “The auction industry has remained strong through the ups and downs of the economy, and we predict that it will remain strong for quite some time.”

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