Commercial real estate auctions have grown in popularity in recent years, providing a streamlined and effective method of buying and selling properties. An auction serves as an additional sales strategy for buyers, sellers, and brokers nationwide. The success of a commercial real estate (CRE) auction is determined by various elements that might have a considerable impact on the outcome.
Three essential factors that can contribute to the success of a CRE auction include choosing the right broker, the choice of auction platform, and effective property marketing.
Benefits of a CRE Auction
- Accelerated Timeline
Traditional sales can be time-consuming, with negotiations and contingencies that might cause the closing process to take months. On the other hand, auctions feature a predetermined deadline that allows sellers to complete the sale within a specific timeframe, resulting in a faster turnaround. The typical auction has a deal life of 75 to 90 days while opening a non-contingent escrow within the first 40 to 50 days.
According to Bisnow, marketing takes four to six weeks during onboarding, allowing purchasers to conduct their due diligence. Third-party reports such as environmental evaluations, property condition reports, property surveys, and the seller's acquisition agreement are all part of this.
- Certainty of Sale
Once the auction is complete, the winning bidder must execute the predetermined purchase agreement within two hours of the auction ending and submit a significant, nonrefundable earnest money deposit 24 hours later. The uncertainty and potential delays associated with traditional discussions and several proposals are eliminated through an auction transaction. Additionally, going through thorough due diligence upfront versus after the offer and only allowing qualified parties to participate in bidding are significant contributors to the certainty of sale.
Unlike a traditional sale, where blind offers and lengthy negotiations can exclude potential buyers, an auction allows full transparency. In an auction, buyers can see the price in real-time and decide whether to match or raise their bid to win.
The broker is provided with extensive analytics that shows how many bidders viewed the listing, registered for the auction, and uploaded proof of funds. As a result, potential buyers have a 360-degree picture of the asset, and the broker has confirmation that qualified, motivated purchasers will participate in the auction.
An auction typically lasts 48 hours, with most of the action happening in the final hours. When the reserve is met, all bidders are alerted and allowed to increase their bids by incremental amounts, resulting in extra profit for the seller.
- Investor Diversity
Anyone can join an online CRE auction as long as they can show the requisite evidence of funding. It opens up bidding to a far larger and more diverse buyer pool.
Additionally, the online nature of the auction platform further enhances its reach. It eliminates geographical limitations and allows buyers from different regions or even countries to participate. This significantly expands the pool of potential buyers beyond the local market, increasing the competition for properties and potentially driving up prices.
Working with an Experienced Broker
Collaborating with an experienced CRE broker who specializes in auctions can significantly enhance the chances of success. A knowledgeable broker may give essential market information, property assessment, and auction strategy. They thoroughly understand the auction process and can advise sellers through the complexities, increasing their chances of success.
A broker can help evaluate the property, find unique selling characteristics, and set a competitive reserve price. They can also assist in preparing relevant documentation, due diligence, and coordination with legal and financial professionals. Additionally, brokers can attract potential buyers and ensure a smooth transaction process.
Finding the Right Auction Platform
Selling a property through an auction offers numerous advantages for brokers and their clients. However, selecting the appropriate auction platform is crucial to ensure that all parties involved can fully capitalize on the benefits offered by a CRE auction.
The auction platform is the process's foundation, supporting bids, paperwork, and secure transactions. Consider criteria such as reputation, user-friendliness, trustworthiness, and the platform's reach among the real estate community when choosing a platform.
There are several key factors to search for in CRE auction platforms.
- The Platforms Reach of Qualified Buyers
Auctions perform best when brokers bring their local buyers and database to compete with the auction buyers. A larger buyer pool enhances market efficiency by ensuring that properties are exposed to a wider range of interested parties. This increased exposure helps to establish a fair market value for the property, as buyers' diverse perspectives and financial capabilities contribute to a more accurate pricing assessment.
- Sell-Through Rate
The effectiveness of an auction site can be evaluated by its sell-through rate (STR), which indicates the likelihood of an asset being sold. Auction specialists use high STRs to assess the value and suitability of an asset for auction. According to Buildout, successful auction events require careful consideration of pricing expectations based on qualitative analysis, market dynamics, and demand analysis for the specific asset.
STR reinforces the platform's ability to execute and bring qualified buyers to the table. Lower sell-through rates are usual for auction platforms that fail to conduct a complete asset appraisal and acquire seller consent. As a result, selecting an auction platform with a high current and historical sell-through rate is vital.
- Competition and Engagement
Remember, auctions are best when competition is active and robust. When multiple buyers are interested in a property, it drives up demand and can lead to higher bidding activity. This competition can result in a higher sale price for the seller, maximizing their returns.
Effective Property Marketing
Marketing generates interest and recruits suitable purchasers for a CRE auction. Effective marketing efforts raise awareness, instill urgency, and showcase the property's essential characteristics and possibilities. The goal is to reach a large number of prospective purchasers who are actively looking for investment opportunities.
To promote the auction, use various marketing methods such as online platforms, social media, email campaigns, and targeted advertising. Using expert photographers and videographers may help capture the soul of the property and portray it in the most appealing light. Consider holding virtual tours to provide potential buyers with a more immersive experience and promote active involvement.
The success of a CRE auction depends on several elements, and careful consideration of these aspects can significantly impact the outcome. By taking into account these factors, sellers can maximize their opportunities for success in the CRE auction market, ultimately achieving their desired goals and objectives.
Robert Anderson serves as Vice President of Auction Services for Matthews Real Estate Investment Services and brings almost 20 years of experience in the commercial real estate space.