The Evolution of Online Commercial Real Estate Auctions
In recent years, online commercial real estate auction platforms have become a popular method for sellers to efficiently dispose of assets. This shift is due to the increasing use of technology and the proven success rates for both buyers and sellers.
Buyers can easily access due diligence materials, underwrite properties quickly, and securely bid on a level playing field. With non-contingent bids and an expedited transaction timeline, online auctions are now seen as a viable approach to buying and selling non-distressed real estate assets.
Sellers choose this strategy based on their objectives. It is best suited for owners with compelling reasons to sell such as death or divorce, partnership dissolution or fund maturation. According to Jim Palmer from Marcus & Millichap’s dedicated Auction Services division: “It could be the result of a death or divorce…all potential reasons an investor would need an expedited transaction timeline with certainty of close.”
Understanding CRE Auctions
Most commercial real estate auctions are Reserve Auctions where there is an undisclosed minimum price at which the owner must sell. While getting top pricing may not be the primary goal for sellers in these cases, it’s still possible by setting realistic reserve prices that attract multiple qualified bidders.
Palmer explains that “it’s about establishing a number that we feel confident will bring in multiple qualified buyers.” Once this reserve price has been met during bidding competition can intensify among buyers who don’t want risk losing out on their desired property over small increments like $25k-$50k.
“Auctions provide true price discovery,” says Palmer adding: “the key is having realistic pricing expectations from our clients so we can create competitive bidding wars.” On average Marcus & Millichap’s Commercial Property Auction Division sees 23% above reserve prices achieved through successful transactions.
How it Works
Marcus & Millichap works closely with sellers collecting comprehensive up-to-date due diligence packages including financials, rent rolls, property condition reports and other third-party documents. These are then uploaded to a due diligence vault accessible by potential bidders on the auction platform.
Sellers can track progress in real-time through a backend dashboard showing how many people have signed confidentiality agreements, accessed the due diligence vault and the number of approved bidders with their profiles. This transparency gives sellers confidence that all possible buyers have been exposed to their deal.
Meanwhile, approved bidders must upload proof of funds as part of their registration process. Buyers range from private capital investors and owner-users to institutional players who perform thorough due diligence during the 45-day marketing period before placing non-contingent bids.
The winning bidder must execute a purchase agreement within two hours after bidding closes followed by wiring an earnest money deposit equaling 10% within 24 hours which goes hard (non-refundable). The transaction is completed in just 30-45 days compared to traditional listings which can take up to one year or more for closing.
The outcome is solely based on highest bid at end of auction without any influence from reputation or relationships like you might see with traditional sales methods according Palmer: “It’s simply about who’s willing pay most…we often see buyers return wanting us sell properties because they like this process.”
But roughly one out ten assets don’t even make it into auctions says Palmer citing recent Chicago office properties sold where buyer submitted pre-auction offers not wanting risk losing out during bidding competition: “it was known local buyer expressed interest before our campaign.” Despite this fact both assets still traded almost $1 million above reserve prices set for each asset while terms remained same as if sold via online auction method originally planned
Benefits
Auctions increase diversity among potential buyers creating level playing field where everyone competes equally regardless size resources available them explains Joel J Gorgian seasoned commercial real estate investor longtime client Marcus & Millichap’s Auction team. “Not only can you realize same results but there’s also advantage having buyer perform on non-contingent, non-negotiable contract,” he says adding: “to be honest it’s total no-brainer.”
In addition to price discovery sellers appreciate streamlined expedited process compared traditional listings which can take 6-12 months close. Auctions provide certainty of close something proving invaluable nowadays where myriad dynamics cause deals unravel.
Gorgian principal Gorjian Acquisitions New York-based national investor specializing opportunistic value-add properties notes that assurance is most significant value auctions offer: “I’ve had buyers tie up deals with me then re-trade or completely walk away when their due diligence period expires,” he comments.
He isn’t alone this observation either according Palmer who adds: “With rates continuing rise, uncertainty market and wide bid-ask spread sellers are looking ways increase their certainty mitigate risk deal.”
Auctions encourage previously interested yet hesitant parties step up execute as they instill urgency fear loss among buyer pool many whom were unwilling perform pre-auction viewing time side.
The Growth of CRE Auctions
As the only major commercial real estate services firm with a dedicated auction division Marcus & Millichap remains bullish about transaction volume growth within its division explains Palmer saying:
“With both buyers and sellers increasingly adopting auction as disposition acquisition strategy our portfolios we’re investing what anticipate will larger market opportunity.” He continues adding that leveraging experienced advisors highest execution track record industry combined database clients broader platform allows them broaden suite services offered clients.
