A long-term commercial real estate broker called this morning, saying, “I have about six listings, and I need to know what’s involved with a possible auction. Talk to me…” These are the best of times and the worst of times in commercial real estate. Today’s uncertain market results in a wonderful time to buy and a possible disaster if you have to sell. It is no wonder that commercial brokers are considering alternative methods to moving inventory—even if the dreaded “A” word becomes a tool in their sales arsenal.
Auctions don’t have to be a last resort or a dreaded alternative when you need to sell real estate at a reasonable price. Watch the difference in the reaction of a prospect when he sees an auction sign go up versus a traditional “for sale” sign. An auction prospect knows that something will happen on a certain date. Urgency is apparent, opportunity is knocking, and prospects begin to think that maybe they need to look into this auction. A “for sale” sign screams, “Please call at your convenience—no hurry—and, by the way, we’ll tell you what you need to pay.” For the seller, an auction contract is simple and non-negotiable with no contingencies. The closing date is certain, and they’ve put down significant and non-refundable earnest money.
So, why shouldn’t every seller put up an action sign? For the most part, the typical seller can’t auction because he owes too much. Or, he shouldn’t auction because the circumstance surrounding the sale or the property itself is not conducive for an auction. However, when the auction stars line up just right, sanity can return to the land and liquidity becomes the new-found friend of commercial real estate.
Obviously, all real estate will sell at auction if price be damned—not a happy outcome for a seller. The question a commercial broker (and any prudent seller) wants answered is, “How do we auction to achieve a reasonable price?” In other words, “How do we get the stars to line up just right?”
First, let’s start with the real estate and circumstances surrounding the sale. “A” grade real estate and/or “A” grade circumstances are essential if you want to auction at a reasonable price. You can pull this off with either component, but having both can be nothing short of magic. If you are wondering if you have “A” grade property, you probably don’t. This type of real estate is the best in its category, and most sellers know it when they have it.
Recognizing a good circumstance is a little more complicated. Property that has not been available or has been tied up in a family estate for a long time; a partnership dissolving; divorce, bankruptcy, or foreclosure; a charity selling a donation; court-ordered sales, etc., are examples of good auction circumstances. If your property is not the best in the market, then focus on and convey to the buyer the circumstance of the sale. If the circumstance is weak, reconsider auctioning the property.
The next “star” that must be lined up involves debt—a big item in the Great Recession. Many informed property owners and seasoned brokers have become so accustomed to equity that they take it for granted. They shouldn’t. Fair market value is a moving target in this market as “willing, prudent, knowledgeable buyers/sellers, acting without undue stimulus” are hard to find—especially the part about “undue stimulus.”
A broker or seller had great confidence when estimating value two or three years ago, but if they feel the same way today, they are delusional. In this market, mortgage lenders should be viewed more as partners rather than adversaries as their portion of the deal may very well be all of the deal. A seller should get to know his new “partner,” and if either partner wants to sell for more than the market will bear, don’t go to auction.
A third and very important component to a successful auction is the seller. An ideal auction seller must be informed and confident of market value, financially capable of selling, and motivated to sell quickly. Unfortunately, this type of seller can be scarce unless you include lenders, bankruptcy trustees, and other players acting in their roles as executors. The seller trying to get top dollar because he is desperate will probably not sleep well after his auction.
Now, back to the commercial broker. Should he encourage his property owners to auction? Perhaps, but only if the property is unique or represents the best of its type and/or the seller is capable, informed, and motivated. This scenario is becoming more the norm and should remain so for the foreseeable future. In some cases, the auction method is unquestionably the best solution for both buyer and seller, and it behooves both parties to explore the pros and cons of this valuable tool.
Henry Glascock is an auctioneer and commercial appraiser based in Chattanooga, Tennessee.