How Do Commercial Real Estate Auctions Differ From Traditional Sales?

In an age of unprecedented market uncertainty across all commercial real estate sectors, handling the disposition of assets can be tricky. Sellers are looking for ways to swiftly convey an asset and maximize sales price. On the flip side, investors are geared up to capitalize on opportunities. That’s the space in which auctions thrive, according to Ten-X Commercial, which was purchased this year by CoStar Group, the publisher of LoopNet.

LoopNet spoke with some of the heads of Ten-X, as well as some brokers that do business on the site, to understand some of the elements of the auction process that prove advantageous on both sides of the deal.

The first step in deciding between the two methods is to determine whether the property being sold is a good fit for an auction. To decide whether to auction an asset, sellers and brokers can refer to auction specialists or third-party platforms to determine how it’s likely to perform and how long it will take, particularly if expediency is of the utmost importance.

Assets that do best in an auction are discussed below, but in general, multifamily, hotels and offices tend to drive the most interest and provide the best opportunities for buyers, according to the online auction platform specialists and brokers LoopNet spoke with. Distressed assets do make up a big component of auctions, but players involved in commercial real estate auctions are quick to point out that “distressed” doesn’t define the market.

If it makes sense to auction a property, the process can start immediately. Beginning the moment a seller agrees to auction through a site like Ten-X, “a buyer could have keys and title to a property within 100 days or less,” said Joseph Cuomo, the firm’s senior vice president and head of sales. That’s significantly shorter than a traditional process, he points out, which is advantageous, in many instances, to both buyer and seller.

Unlike traditional sales, a lot of the dynamics that shake out in the closing process are handled upfront. To auction a property on a site like Ten-X, for instance, the first steps after the initial agreement involve an asset manager from the platform that’s assigned to the property scrutinizing the title, obtaining all due diligence reports and lining up escrow arrangements for closing.

This might not be the case with all auction platforms, Cuomo added, but Ten-X goes to work immediately on supplementing any of the broker’s existing marketing of the property, which includes lining up professional photos, reaching out to potential buyers and buyers’ agents, vetting leads and building out an asset page online, with all the property’s relevant information and promotional material, within about two weeks.

Sellers then pick a reserve price, which is the minimum they’re comfortable selling for, and the team starts garnering and fielding buyer interest right away.

One key advantage to sellers over traditional means can be the auction platform’s assistance with marketing and sales outreach. Ten-X, for instance, fields and relays a tremendous amount of inquires — such as concerns about the age of a property’s roof, or market conditions that might affect the deal, Victor Gutierrez, vice president of platform operations at Ten-X explained — and “divides and conquers” the handling of these requests.

“We work in a partnership with a broker and every week we update the seller as to how our marketing campaigns are going and the feedback that we're hearing from the market,” he added.

If buyers are serious about purchasing the property, they sign confidentiality agreements, noncontingent purchase and sale agreements, and in some instances, make a hard money deposit of around 10% of the purchase price within a 24-hour window of their final bid, which is nonrefundable if they win.

This all adds up to sellers knowing who is serious. “We’re trying to prepare the seller ... during this 45-day marketing period, and all of that leads up to auction day, by which time the seller should have a good idea of what’s going to happen,” Gutierrez said.

One of the most important elements of a successful auction, said Tyler Hague, senior vice president of Colliers International’s National Multifamily Advisory practice, is pre-qualifying potential buyers. Buyers must provide some information about themselves when they register for the site, anyway, but brokers get the jump on this by conducting their own outreach efforts.

With the marketing, outreach and data collection efforts that occur prior to auction day, the information a seller has on potential buyers before bids go live is advantageous in facilitating an efficient transaction.

In the days before the auction goes live, buyers have a chance to get set up to properly bid and help position themselves as best they can to win and close on a deal. To bid, investors must register and provide proof of funds if they are noninstitutional or new to the platform, and they have zero wiggle room to negotiate after the winning offer, Colliers’s Hague said. On the seller’s side, he explained, “certainty of execution is probably the number one reason to auction a property.”

One benefit for both sides, Hague added, has to do with the engagement among bidders, which is an important dynamic in reaching a price that both parties are excited about. The inherent nature of an auction empowers the buyer as well: it democratizes the process, so it's less about relationships with brokers, as is the case in traditional sales, and more about intent to win, strategy, and having the cash to back it up.

Compared to a traditional process, in which more time is drawn out in the negotiation process, auctions cut through an array of interested parties to zero in on the buyer who wants the property most. As Gutierrez said, whoever offers the best price wins.

“With the private capital market, or even more so for the sub-$10 million space, the buyer pool in these auctions seems to act a little more aggressively than most traditional buyers would in a normal process," Hague noted. "Once these buyers get invested in these deals, it usually comes down to a few potential buyers really bidding up the deal quite a bit up until the last minute of the auction.”

Hague’s team had historically focused on traditional sales until relatively recently, after a streak of successful auction deals. “One of the assets we sold this year was 485% of the reserve price … I don’t know if we would have gotten that same result in a traditional sale given that it was only 40% occupied and seen as a challenged deal.” As some sources pointed out, a completed auction can sometimes be a better determinant of what a property's really worth on an open market.

Hospitality does “gangbusters” on Ten-X, Gutierrez said, and value-add assets do really well in general, especially if they have a leasing component or a repositioning component, such as a potential conversion of a Class C multifamily asset into a Class B property.

The buyer base tends to be a bit more opportunistic in general, he added, so value-add properties do generate a lot of interest. Furthermore, he said, multifamily does exceptionally well as an auctioned property, because it’s easier to underwrite and easy to understand from a buyer’s perspective.

The “sweet spot” on Ten-X now happens to be properties in the $3 million to $5 million range, he added, making it ideal for smaller, noninstitutional investors.

In Hague’s experience, multifamily leads by far with hotels and offices following to represent the three commercial real estate asset classes that have done best in auctions he's observed. But deciding whether to auction a property mostly comes down to the individual asset, its status and its location.

“If you’re in a gateway market with zero distress and you have a pretty sellable asset as is, that’s when you really don’t need to auction, but if you’re selling something in a secondary location or tertiary location and/or it has some kind of issue, I think that’s when it’s especially smart to auction through a site like Ten-X,” he continued. “If you have a brand-new Class A or 4-star office in Austin, Texas, for example, you don’t have to hold an auction to push the price on that. So when you do auction, it has to be thoughtful, but when executed properly, it’s very successful.”

Auctions can cater particularly well to maximizing the price of distressed assets, while also providing opportunistic buyers avenues for making a shrewd deal, Hague continued, but no, auctions are not confined to distressed assets.

Auctioning is a sales tactic, Steven Jacobs, president of Ten-X told LoopNet. “It's a way of selling. That's all it is. It's not a negative. It doesn't [always] mean your property is distressed.”

In the first few years of business, shortly after the Great Recession, Ten-X’s auctions comprised around 80% distressed assets, he explained. “Now the business is sort of the inverse,” he added. “It's about 30% distressed revenue and 70% private client revenue.”

Auctions are also a great way to sell an asset’s debt rather than the property itself, Hague said, which can be a smart investment. “We’re also ramping up our note sale business quite a bit, and that exclusively is going to be run through auctions.”

Due diligence is fundamental to any large commercial real estate transaction and paramount to making a smart investment. To many newcomers, the expediency of the auction process might warrant some skepticism that key aspects of the property or its title history could be overlooked. But brokers that LoopNet spoke with, along with conductors of the Ten-X platform, urged potential participants to fear not.

Not only are all materials and steps for due diligence required and organized before a property is marketed, but the third-party platform generally acts in a vetting capacity as well, says Ten-X’s Gutierrez.

To sell a property on Ten-X, the listing agent or broker is required to provide as much information as possible, including information on the title, to ensure the seller owns the property and can convey it to a buyer. Getting that step out of the way first and foremost is prudential, because conveying a clear title is the most important aspect of the deal. As Gutierrez says, “At the end of the day, we’re selling paper — a piece of paper that says, ‘I own this building.'”

Environmental and property condition reports are due upfront as well. In the case of Ten-X, sellers can recommend preferred vendors or work together to order third-party reports, but either way, the step is taken to eliminate as many unanswered variables as possible before pricing is even discussed.

Because sellers are required to shell out all this information on the front end to prepare for a climatic sale that then closes in as little as 30 days after the winning bid is secured, buyers also benefit, Gutierrez said. But buyers should take the time to sift through due diligence documents and get comfortable before bidding, because they’re pretty locked into the deal if they do place the winning bid.

The process to register as an eligible bidder on an online auction site is relatively similar across platforms, Ten-X’s Gutierrez explained, and it starts with simply creating a profile on the site with some basic information about your investment interests and positioning.

Registrants then have access to search properties slated for upcoming auction events and an ability to request private due diligence documents after electronically accepting a confidentiality agreement.

Following that, an investor must formally register to bid at a particular auction event, along with providing time-sensitive proof of funds that set a ceiling for bids in order to verify that a potential buyer can pony up the funds to transact.

After those steps are done, bidders are set to place bids through their account — from anywhere with an internet connection — during the event.

There are usually a few early bidders in the 48 hours or so an auction is open, Gutierrez said, but the key turning point in an auction event is when the reserve price is met. That’s when the buyer knows the property will be sold. From that point on, Hague said, it’s a dynamic process that involves adjusting minimum bid increments to maximize bids on the sale side, and concerted strategy with timing successful bids on the investors’ side.

“As soon as you see that reserve met, you know the property is selling that day and it's yours to lose,” Gutierrez said.

Sometimes, early interest results in parties wanting to buy out the deal early and take it off the market, which Hague noted can be one of the only significant challenges about auctioning, since sellers sometimes can be influenced by an early offer instead of trusting the process. “If you start the auction process you should see it through, so once the freight train leaves the station, it’s not stopping. I would say that’s one of the only pitfalls.”

From the buyer’s perspective, he added, it could be frustrating if you really want to buy the property but don’t end up producing the winning bid, especially if it comes down to the final moments. An advantage of a longstanding site like Ten-X, though, he posited, is that it has built up a reputation over time that its transactions are legitimate, and that there’s no one pushing up the bids arbitrarily, as could have been the case with some other platforms in the past.

And the excitement of the final moments does result in the process being both emotional and sometimes “fun,” Hague continued, as most activity happens in the final moments before an auction ends.

Immediately after the auction is won, the successful bidder is walked through the next steps, which involve corroborating proof of funds, signing some paperwork and setting up the terms of the deal so that it can effectively close within 30 days.

Occasionally, but very rarely, a buyer might try to pull out of the deal at that point, but as Hague mentioned, a winning bid usually means that the parties are ready to start closing the deal.