FEATURE ARTICLE , APRIL 2005

AUCTION ACCELERATION
The speed and openness of the auction method attracts more and more commercial real estate buyers and sellers. 
Lisa Higgenbotham

Higgenbotham

In 2003, consumers spent more than $200 billion at live auctions sales. Better than 20 percent of that sum represented real estate sold at auction. Consumers in the western United States spent nearly three times that of consumers in the Northeast.

Auction buyers enjoy bidding competitively based on the same terms and conditions. A typical auction property is sold with no contract contingencies as the buyer is expected to perform his due diligence prior to the bidding. Due diligence packages are provided by the auction company in advance of the auction date so buyers can check out the property prior to bidding. Buyers come into the process knowing that the seller is ready to sell, and is not just shopping the property.

Sellers are able to control the structure of the sales process from marketing through closing. Corporate clients appreciate the opportunity to set both the timing and the terms. Depending on the property type, closing is anywhere from 30 to 60 days after the sales date.

A recent auction featured a 16,000-square-foot vacant retail building in Northern California. The on-site auction attracted more than 50 bidders and resulted in a contract of $1.9 million with full-cash settlement in just 45 days. Another sale of a 40,000-square-foot industrial building in Colorado Springs yielded a sales price of $1.675 million and was closed within 45 days of the auction.

Are these sales results typical? Yes. Many people expect to see a roomful of “bottom feeders” at an auction. The reality is that the majority of buyers are well-capitalized, educated ones who recognize and appreciate the chance to buy without going through the seemingly endless cat-and-mouse game of the offer and counter-offer process. At auction, buyers have the confidence that they are paying fair-market value.

What percentage of value is achieved when a property is sold at auction? In a recent nationwide portfolio sale for a Fortune 100 paper company, auction results produced an average of 74 percent of appraised value. Bear in mind that these appraisals were based on a marketing period of 18 to 24 months. When you factor in that the annual holding cost of an asset is 25 percent of the asset’s value, you realize quickly that the auction has indeed produced market value.

When sellers commit to the auction process, they are then certain of the sale date and closing. How can this “date certain” method of sale help a seller? Many corporate sellers are able to use the auction method to boost earnings during a specific period of time. Other sellers use the process to control timing during strategic sales and acquisitions in a 1031 exchange. A recent sale conducted in Colorado allowed partners to cash out and pursue other interests.

Why would you use an auction in a market that is already hot? Interestingly enough, this is often the best way to sell a high-demand asset. Why would you set a “ceiling” on the price? Let the market tell you what the asset is worth. A recent example comes from a retail store in Southern California. As the auction date moved closer, interest in the property was tremendous. Four days before the auction, an offer came in. After reviewing the contract, the sellers felt there was no way an auction could produce a comparable price and accepted the deal. The auction was conducted to establish a back-up contract. Bidders were understandably disgruntled to find the pre-auction offer had been accepted, but were still willing to participate. The pre-auction offer was $2.5 million, but the auction contract was $2.75 million. The perceived safety of the pre-auction offer cost the sellers $250,000.

All types of real estate are sold at auction, including both vacant and leased commercial properties, surplus buildings and vacant development tracts, industrial properties, farms, and ranches. There are also an increasing number of net leased properties being offered at auction. Auction sellers are individuals, partnerships, institutions, lenders, Fortune 500 companies, privately held corporations and trusts. Auction buyers, ranging anywhere from the proverbial “little old man” to corporate executives,  show up to buy million dollar assets at auction.

One key factor in the success of any auction is to maximize exposure in the marketplace. A recent auction in Bellingham, Washington, produced 18 registered bidders  Although the high bidder represented a retailer based in Seattle, several other bidders were from outside the state.

The auction service has been invaluable to many national corporations that have made dramatic personnel cuts in their real estate departments. In many cases, one or two real estate directors are managing nationwide portfolios worth millions of dollars. Strategic moves in the marketplace produce thousands of surplus real estate assets on an annual basis. These properties move to real estate directors as surplus. Each site presents a myriad of management issues. Utilizing the auction and “date-certain” method of marketing and sales effectively eliminates these management issues while making funds available for other projects. Many companies recognize the benefit of utilizing the auction method of marketing to reduce the holding costs of their unproductive assets. For instance, during the last 2 years, Albertsons has sold more than 150 properties at auction.

Lisa Higgenbotham is vice president of commercial real estate for Higgenbotham Auctioneers International Ltd. in Lakeland, Florida.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.