Seller Best Practices for Online CRE Auctions

In a previous article, LoopNet outlined some key best practices for bidders participating in online commercial real estate (CRE) auctions. For sellers, as well as buyers, participating in online CRE auctions — such as those conducted by Ten-X Commercial, an affiliate of LoopNet — can offer numerous advantages, including a more diversified buyer pool and swifter closing.

However, online CRE auctions are often unfamiliar territory for many investors, which is why LoopNet spoke with two brokerage professionals — Evan Lyons, a Michigan-based senior director of investment sales with Encore Real Estate Investment Services, and Harrison Klein, an associate with Marcus & Millichap focused on the Boston region — to compile a list of best practices for sellers participating in these events. Both Lyons and Klein have been involved in myriad successful auctions, representing both purchasers and sellers.

Based on our conversations with Lyons and Klein, LoopNet developed the following list of best practices for sellers involved in online CRE auctions:

• Provide all relevant asset information upfront.
• Resolve any issues in advance.
• Discuss pricing expectations with the broker and auction facilitator.
• Leverage the expertise of professionals.
• Understand the respective advantages of reserve and absolute auctions.
• Remember that traditional marketing is still critical.
• Be flexible on auction day(s).

At the outset of our conversation, Lyons noted that, “The number one best practice is to present all information in a seller’s possession about that asset on the front end, to not only the auction platform, but also to the broker.” According to Lyons, by taking this approach, a seller can ensure that both the auction facilitator (the representative from the auction platform that has been assigned to your property) and the broker have all the information they need to, “effectively underwrite and decide on an auctionable and obtainable sale price.” Lyons went on to say that withholding any relevant information about the property can also jeopardize the auction process if those details are discovered at a later date. He further advised that declining to provide certain data can slow down activity, which can be particularly injurious in the accelerated timeframe of online CRE auctions.

“This is the time to brag. Tell us about every dollar spent by ownership or even past ownership over the last three, five, 10 years. Every little bit spent on that building for maintenance and upkeep helps us to defend against deferred maintenance items that are brought up by buyers,” he added. It’s also helpful to provide any insights you have regarding business activity proximate to the property. Are there new tenants or developments coming to the area that could have a beneficial impact on your property? That kind of insider market intelligence can augment the broker’s ability to market your property effectively.

According to Klein, simplicity, in terms of a property’s “story” is key to a successful auction. If there are any minor issues with the property that you can resolve in advance of beginning the auction process, it can be beneficial to do so. “You want to have as simple of a property as possible,” Klein said. “If there’s some minor [issues] on the rent roll that need to be dealt with, get them dealt with upfront. If you need to do a lease extension, get it done upfront.” Proactive attention to these details makes the investment more straightforward and easier to underwrite, which should lead to enhanced attention from bidders.

Lyons emphasized that it’s important to coordinate with both your broker and auction facilitator regarding your pricing expectations for the property. All parties should be aware of the seller’s ideal pricing, as well as their bottom line. “If we know what real expectations are, everybody’s going into [those] auction day[s] with a clear understanding of what needs to be done.”

When discussing details such as where to set the initial bid price, Lyons suggested deferring to the auction facilitator, and leveraging their experience regarding the platform to guide your approach. When pressed on the question of where to set the initial bid price, Klein was somewhat reluctant to volunteer any trade secrets, but he conceded that it should be well below the seller’s desired sale price, somewhere in the neighborhood of 30% of that figure.

With regard to the reserve price, Lyons said that deciding on that crucial number is both “an art and a science” and should be developed through a collaboration between the seller, broker and auction facilitator. However, he acknowledged that, “The party to the deal that would know best, strategically, where to price the reserve, would be Ten-X, or the auction platform.” Of course, that begs the question of whether to utilize reserve pricing at all, which neatly brings you to our next best practice.

Let’s get the nomenclature out of the way first: reserve auctions are those where the seller has set a “reserve price,” or a minimum threshold that the bids must reach before a sale can take place. In an absolute auction, no such threshold has been imposed, and whether the property garners a single bid or 100, and no matter how high the final bid is, that asset will sell at the end of the auction period.

For Klein, the absolute auction simply represents too great of a risk. “The type of properties that I’m working on with an auction platform are going to be anywhere from $700,000 to $5 million. In that price range, typically, people are not in a position to say, ‘hey I’m committing to a sale even if only one buyer shows up and I have to sell [a] $1 million property for $100,000.” For this reason, Klein has never participated in an absolute auction, and generally counsels against them.

Lyons, on the other hand, felt that there were advantages to the absolute approach, though he also suggested that sellers need to proceed cautiously. He said that the absolute auction takes maximum advantage of the auction platform’s marketing reach and “it also sends a signal to incoming buyers that this deal, more than any other, is going to sell,” he said. “I think there’s a nice excitement and buzz that allows us, as brokers, to drive investors to [that deal] because there’s no question of whether it’s going to trade hands.” Lyons went on to say that absolute auctions were probably most suited to single-tenant properties where the value was clearly defined. For multi-tenant or value-add opportunities, they are probably less appropriate.

As for where to set the reserve price, assuming a seller takes that approach, Klein’s view was fairly straightforward. “By definition of what a reserve is, I think the idea is that it’s the minimum price that someone would be willing to accept [for the property].” Lyons, however, could envision scenarios in which some gamesmanship could be applied to the process of setting the reserve price. Once the reserve threshold is met, it tends to instigate a flurry of auction bids, as bidders become encouraged by the notion that the property is definitively going to trade hands that day, so there could be an advantage to setting a lower reserve price. If the seller has minimal partnership or debt obligations and is somewhat flexible on the price, Lyons felt that, “The owner has the liberty of incorporating some of that additional strategy into the platform.”

Both Klein and Lyons emphasized that even though an online auction might, at least at present, not be the typical method for selling a CRE asset, the process still incorporates significant aspects of traditional property marketing. Klein said that, “It’s still a matter of having to get people to make purchase decisions with their head and with their heart, and so having pictures that look a little bit better, having a building that shows a little bit better, is still important.” Lyons echoed this sentiment, and said that any marketing materials, including drone footage, professional photography, flyers, etc. should be incorporated into the auction listing.

Klein and Lyons also, perhaps unsurprisingly, agreed on the central role that the seller’s broker still plays in the process. In fact, on most online CRE auction platforms, licensed brokers are required to list the asset. “These deals have to be worked by all parties involved on a daily basis. It’s proactive marketing, it’s not reactive,” said Lyons. Klein concurred, saying, “At the end of the day, there’s going to be that step between when someone signs a nondisclosure agreement to review the marketing materials and they actually register for an auction where they need to be sold on the deal. Someone has to talk to them and … walk them through zoning, walk them through the local area, walk them through what’s going on next door and explain to them why they should buy this deal.”

Notwithstanding Lyons’ earlier advice about defining price expectations in advance, he also counseled that sellers should remain somewhat flexible once the actual auction begins. “Because of new information found, or because of feedback provided by the marketplace, we may get a number that isn’t exactly what all of us expected, but a seller should have an open mind,” he said. He added that because auctions offer near certainty of a swift and successful closing, and because there is only a modicum of effort required on the part of the seller once the actual auction is complete, a sale at a somewhat discounted price could still be worthwhile.