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COVER STORY, JUNE/JULY 2011
CONFIDENCE ON THE AUCTION BLOCK
To get the best price for sellers, an auctioneer must convey to buyers that an opportunity is worth the investment of time.
By Jaime Lackey
Time and money: auctions are a great example of the equation in action. Commercial real estate auctions require potential buyers to invest a great deal of time in due diligence and research. While the potential for a great deal is there, interested parties need to know that their investment of time stands a good chance of paying off.
And how do an auctioneer and seller instill in potential buyers the confidence required to gain their interest? "We must choose an auction strategy that assures potential purchasers that the seller is sincere with regard to accepting the market," says Tom Saturley, president of Tranzon Auction Properties.
Saturley, who is based in Portland, Maine, explains: the marketing of the property must give buyers an indication that the seller does intend to sell the property and that the company is not using the auction process as an exercise for appraisal. In order to establish confidence in a particular auction, sellers can commit to selling a property regardless of price or determine a reserve (a minimum price at which the seller is willing to sell).
In the current economy, these types of auctions are driving interest from end users and from investors who intend to hold a property for the long term, says Paul McInnis, president of North Hampton, New Hampshire-based Paul McInnis Inc. Real Estate Auctions.
However, commercial real estate auctions still are not seeing much interest from other investors. McInnis predicts this will change by 2012: "In 6 months to a year — as investors see an opportunity to turn a property for a profit — we will see more interest from the investor community."
Confidence is also related to the potential buyers' perception of the auctioneer's character. Auction companies build reputations based on the auctions they complete so it is essential that they qualify sellers and help set their expectations, Saturley says. "Auction companies must understand the goals of sellers — and they should ensure sellers have reasonable expectations with regard to the value of the property." In doing so, Saturley says, auctioneers fulfill the obligations to their clients and preserve the credibility of the auction process.
Technology also helps to build interest in particular properties among likely bidders. Today, technology enables instant real-time access to information, including title reports, environmental reports and appraisals. Interested buyers can sign confidentiality agreements electronically and gain immediate access to documents related to the property, McInnis says.
Even eBay has shaped confidence in commercial real estate auctions. "eBay exposed the concept of auctions to a new generation," Saturley says. "In the past, auctions represented negativity. eBay helped make auctions 'cool.' It really has created a change in the perception of buyers and sellers. Neither buyers nor sellers are as intimidated."
Technology has also created different auction strategies. The Internet has made online auctions possible — beyond eBay. And these types of auctions have proven extremely effective with certain property types, including unbuilt lots. "We've sold 150 vacant lots in one day in an online auction," Saturley says.
In addition to creating efficiencies in the auction process, Internet and email communications have changed how companies market auctions. "Technology has improved our ability to market to a variety of people. In the past, it required an enormous amount of research to gather names of parties that might be interested in a particular property," Saturley says. "It is much easier to reach a large number of potential buyers today."
In April 2010, Tranzon handled the auction of a 50,000-square-foot bank-owned retail center in East Haven, Connecticut, for $2.1 million. There were 230 inquiries and 18 bidders.
The company also handled the auction of a 23,000-square-foot retail property in Hampton, New Hampshire, in August 2010. The property had been foreclosed when the anchor space went dark. "The auction fetched $2.2 million, which demonstrates just how well the auction methodology works," Saturley says.
In June 2010, Tranzon handled the auction process for a 17-property gas station and convenience store portfolio in Massachusetts and New Hampshire. "These were not great locations. They were closed or abandoned sites. But we were able to use technology to support the buyers' due diligence. They were able to see environmental issues, title issues, and taxes. Their comfort level allowed us to achieve true market level, and the auctions far exceeded our seller's expectations," Saturley said.
In May, Paul McInnis Inc. completed a sealed-bid auction for a 60-unit garden-style apartment property in central New Hampshire. The auction, which had a minimum bid of $1.95 million drew interest from 39 prospects who signed the confidentiality agreement. The property went under agreement before the bidding deadline. Prior to the auction, it sat on the market for more than a year with no activity.
In June 2010, Paul McInnis Inc. handled the auction of a former GMC car dealership that was located on the city line in Malden and Melrose, Massachusetts. The 4.2-acre parcel in Malden contained a 38,000-square-foot building. The 4.9-acre parcel in Melrose contained a 22,000-square-foot building. The properties were offered separately and together with an aggressive minimum bid of $3 million. The properties sold separately for $4.15 million. End users, namely a regional paving company and a regional plumbing supply company, purchased the properties. The auction drew interest from 47 states and seven countries.
All of these auctions were completed with the aid of the Internet. And new technology will continue to affect the auction industry in ways we can't yet imagine, Saturley predicts. He points to Apple's recent announcement regarding the iCloud as an example of technology that could be harnessed for the auction industry. "As professional auctioneers, our challenge is to figure out how to use this technology to achieve the maximum results," he says.
And the maximum results are a function of efficiency, reaching the most and best potential buyers — and creating confidence that the property and the auction strategy are worth the investment required for due diligence.
On-the-Ground Auctions Suit Financial Institutions' STRATEGY
With the huge build-up in REO inventory over the past few years, banks and financial institutions must be wise about how they dispose of their real estate. They are using accelerated marketing and auction companies to dispose of properties, but they want to set up sales to achieve the highest possible value for what they are selling. In today’s rough marketplace, that leads financial institutions to rely on bids from end users. The need to attract end users should lead financial institutions to consider on-the-ground auctions.
End users typically pay more for commercial assets than investors — and this is especially true in today’s market. For this group a purchase is not just a real estate play, but a strategic acquisition. In today’s market, it is the end users or investors bidding against (or sometimes on behalf of) end users who bid property values to levels that financial institutions can, or need to, live with.
Historically, the on-the-ground auction format has created a stronger connection with the end user than any other auction format. On-the-ground auctions are more accessible to these individuals, who are typically from the local business community. The idea of travelling to a ballroom hours away for the chance to possibly get the property they want is not a compelling motivation for potential buyers. On-the-ground auctions also allow auction companies to offer greater support to buyers. When an auction company has the ability to help buyers through the auction process, buyers become more comfortable with the process — which ultimately leads to more confident, and therefore, more aggressive bidding. This is especially helpful during the executory phase, where knowing the local customs and procedures helps carry the buyer to close and greatly streamlines the process. On-the-ground auction teams also can produce much more comprehensive and complete due diligence information for the buyer, getting them what they need and instilling confidence in the property and the process. Even though remote teams feel like they can produce sufficient due diligence, it is often not enough to get buyers comfortable because they have had little to no physical and actual knowledge of the property. End users are often very concerned about the readiness of a property for a particular use or other local rules and regulations, so having a local on-the-ground auction team who knows these answers as well as the local politics can greatly enhance any bidding. In addition, much greater control is given to the financial institution being advised by the on-the-ground auction team, with the ability to tailor specific terms and conditions to the individual sale as opposed to generic contracts, terms and conditions that may not be applicable, thus confusing buyers.
Ballroom auctions are sometimes seen as more cost effective than on-the-ground auctions. However, it is a bit short-sighted to allow the small savings gained from the economies of scale that are achieved as a result of a large marketing campaign associated with a ballroom auction to drive lender policies with respect to auction type. In fact, some firms with large platforms can market and implement on-the-ground auctions while achieving economies of scale substantially similar to those conducted by ballroom auction.
On-the-ground auctions are the most effective way for financial institutions to sell and market real property in today’s marketplace, and they are the best way for financial institutions to maximize recovery of their REO assets.
— Oren Klein is a partner with Tranzon IPG, and Joshua Olshin is president of the company. Klein is based in Essex County, New Jersey, and Olshin is based in New York City. |
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