What CRE Buyers Need to Know About Live Bid and Managed Bid Online Auctions

A typical online CRE auction culminates with all of the interested buyers placing bids on an asset during a live online auction event. These auctions, which are open to all registered bidders, are commonly referred to as “live bid” auctions. Sometimes, however, sellers and brokers employ a different sales method called a “managed bid,” which typically results in only the most qualified pool of prospective purchasers advancing to the final auction.

LoopNet spoke with professionals at Ten-X Commercial, which was purchased this year by CoStar Group, the publisher of LoopNet, about the mechanics of these approaches, and why sellers and brokers choose one process over the other.

To understand the managed bid approach, though, it’s important to first be aware of the steps involved in Ten-X’s live bid method.

The detailed buyer process has many steps, but its key stages are summarized below.

• View listings. General information about each property is available to anyone that visits the auction site, whether or not they are signed up as a potential purchaser on the platform. This includes basic property information, such as a description of the investment opportunity, type of ownership and parcel number. Auction details, like the opening bid amount and the dates of the live auction, are also included.

• Sign up as a buyer. Potential purchasers interested in learning more about a property can sign up as a possible buyer, execute the confidentiality agreement and download detailed due diligence documents about the asset, such as financial and operating statements, purchase agreements and environmental reports.

• Conduct due diligence. Get to know the asset by reviewing documents, talking with the listing broker and other real estate professionals and touring the site.

• Register to bid. If you are interested in potentially purchasing the property, you can register to bid during the live online auction event, which is held over a two-day period.

• Provide proof of funds. To register you must provide proof of funds that are equal to your anticipated maximum bid for an asset.

• Participate in the live auction. During the live auction, watch bids come in, and submit your own bids. The highest bid when the clock expires wins the asset.

The managed bid approach generally follows the live bid process except for an additional step along the way. After potential purchasers conduct due diligence, they are asked to submit an indicative bid. This bid is nonbinding and should equate to the full amount a potential purchaser is willing to pay for the asset.

Nonbinding indicative bids help sellers and brokers gauge the interest level among prospective buyers and determine potential pricing. Sellers and brokers use the data collected to set market-realistic levels for key metrics such as the opening bid, bidding increments and the reserve price so the asset can move to the final “live bid” phase.

Indicative bids also help qualify potential buyers because they can provide information such as the buyer’s sources of capital or experience in the market. Queries submitted as part of the bids can identify important underwriting-related questions and generate comments about the Purchase and Sale Agreement. Ten-X uses this information to determine next steps between the indicative bid round and the final auction. Next steps can include sending out tenant estoppels, conducting tenant interviews, making changes to the PSA based on bidder feedback, and other such measures.

The marketing process for a live bid auction typically takes about 45 days at Ten-X. However, with managed bids, marketing is over after indicative bids are collected, which is generally midway through the normal marketing timeframe. Victor Gutierrez, vice president of operations at Ten-X, said, “The goal here is to get 10 to 15 indicative bids and create a shortlist of six or seven finalists,” that will be invited to take part in the live auction. The finalists conduct their final underwriting between the indicative bid and auction dates. Gutierrez noted that “Investors who are invited back to participate in the final auction like this step because it limits the potential number of auction bidders,” increasing the odds of their winning the asset.

After the indicative bid date, indicative bids and buyer qualifications are reviewed by Ten-X professionals, the seller and the listing broker, Gutierrez said. The most qualified buyers are invited back within 48 hours and asked to complete their due diligence. Some buyers engage their own professionals to conduct third-party reports and make arrangements to tour the property. They ask Ten-X to send estoppels or conduct tenant interviews and they seek financing and internal approvals to compete in the final auction. “The final auction usually takes place two to three weeks after the indicative bid date, [providing] enough time for buyers to wrap up their underwriting,” he added.

Listings are not labeled as live or managed bids on the Ten-X platform, explained Kim Phamvu, product manager at Ten-X. Instead, there are differences within the listing details that indicate to the buyer that the property will pursue the managed bid route. “One difference is that when the listing is made public, a minimum bid amount is not posted,” she said. Additionally, a banner on the listing indicates that indicative bids are due by a certain date. In most cases, an indicative bid should equate to the highest price an investor is willing to pay for the asset and the opportunity to submit indicative bids is presented to all registered buyers on the platform.

There are several reasons that assets are marketed using the managed bid process:

• Satisfies credit committee processes.
• Assists with price exploration.
• Teases out benefits and detriments of the asset.
• Enables widespread marketing with a limited buyer pool.

Satisfies credit committee processes. The managed bid approach is used for higher-priced assets where the target buyers are institutional owners and these groups have strict buying guidelines that must adhere to credit committee processes. “Managed bids allow these buyers to express interest in an asset and then seek internal approvals should their pricing get them invited to the final round,” Gutierrez said.

Assists with price exploration. Through a managed bid, sellers can test the waters and see how much interest there is in the asset and what price potential buyers are willing to pay. “With a live bid, we typically will set the starting bid almost immediately, and typically it is based on some percentage of the reserve price. With a managed bid, we don't set the starting bid until we receive indicative bids,” Phamvu said.

“The indicative bid round is typically [held], 14 days before the auction,” she added. “And once those indicative bids are received, the seller and broker review them and [along with the Ten-X asset manager], advise on what that starting bid amount should be.”

Teases out benefits and detriments of the asset. Obtaining these bids give the seller and broker not just data points regarding pricing, Phamvu said, “but also insight into what the market is saying about the property.” This information comes as brokers talk and exchange emails with interested parties that are downloading documents, taking tours and asking questions while they conduct their due diligence. Questions and comments generated by potential purchasers can often point to problems or opportunities that sellers and brokers, despite their thorough assessments, have not yet focused on.

Enables widespread marketing with a limited buyer pool. According to Phamvu, “With this process you get the benefit of widespread marketing on the platform with the ability to shortlist the potential buyers,” to those most qualified and interested in the asset. While indicative bids are sought, the property is marketed on the Ten-X platform, so all visitors to the site are made aware that the asset is available for sale. But after widespread marketing on the platform, sellers can create a shortlist of buyers, giving them maximum reach during marketing but exclusivity during the bidding phase.

“Typically, sellers chose [the] managed bid [process] as a transaction method for higher priced assets or to have a more exclusive auction so they can vet potential buyers more carefully.” Asked why a seller would want to apply this level of scrutiny to potential purchasers, Phamvu said that exclusivity is sometimes sought by sellers that are seeking maximum confidentiality around the finances, leases and operations of an asset. Rather than share their most sensitive documents with a wide array of potential purchasers, they prefer to do so with a more limited group that comprises the most likely purchasers.

Buyers new to the online auction process may be hesitant to bid on what may turn out to be a private sale. However, since indicative bids are nonbinding, this may be a new avenue worth exploring, especially if the asset class and investment strategy complement an investor’s overall portfolio.