Recently GlobeSt.com ran an article about several national brokerage houses adding auction services to their line up of available product lines. After reading the article, I had the opportunity at lunch to discuss the trend with one of the regions most active investment sales brokers. It was a very interesting discussion as we tried to hash out whether auctions would take off as a trend for institutional level assets, or whether it would be solely reserved for the smaller, private equity transactions.
I’ll fill you in on the results of our conversation later (I don’t want to bias your comments), but I would be very interested in hearing some of your thoughts on Auctions as a buying and selling tool for institutional investors.
So, on with the comments…
I can tell that I, for one, am not a fan of the auction format. I think it lends itself very well to very small and/or very local deals. However, what institutional buyer wants to buy and asset and not have a proper due diligence period?
DHarrow is right. Thee added risk that goes along with no real due diligence period means that pricing is much lower. That could be good for buyers (assuming uncovered DD items don’t blow through any savings), but its never good for sellers. They’ll realize an unnecessarily low price.
Brokers that suggest auctions for their sellers are lazy and doing their client a disservice. Why suggest something that almost guarantees a low price? They say it’s “quicker”. However, what broker in the market right now doesn’t have some extra capacity to manage an accelerated non-auction sales process. Weak, weak, weak…
I like the auction process. Real estate is a risky business. Buyer beware. If I get a lower price then I can underwrite around the additional risk. No doubt it’s there, but I’m reasonably confident I can work around it. Just my $0.02
I have been a Realtor and auctioneer for over 30 years and have auctioned every type of real estate in every corner of the United States and can tell you that success at auction depends on the demand for the category of the asset. In general apartment buildings/complexes and retail command higher prices when sold at auction (due diligence information provided a priori by the auctioneer)than in a ordinarily negotiated or sealed bid sale. Office, industrial and most vacant land (not farms or extremely well located land) get hurt by an auction.
I often hear from institutional buyers that they will not participate in an auction, but at the end of the day (and particularly for auctions that exhibit a compelling motivation or are absolute…no reserve)the fear of loss will have them showing up on auction day and prepared to bid. These types of buyers also appreciate that they won’t be bidding against unqualified bidders (“…if it wasn’t for the money, I’d own the Empire State Building” type buyers).
The auction approach is them most efficient manner of sale and an extremely valuable tool to have in your brokerage arsenal.
http://www.linkedin.com/in/davidmkaufman
Going, Going, Gone – Thank Goodness!
Real estate auctions seem to be emerging as prudent strategy for reo, workouts, distressed properties, corporate management and public officials conversation. A well executed auction strategy can bring a definite conclusion within a defined timeline to what might otherwise be a lengthy and uncertain outcome. Banks, loans, defaults, borrower issues, mergers, downsizing, outsourcing and enhanced productivity causes surplus real estate. Keeping this real estate may be costly. Auctions may be the most logical and prudent answer. Our national auction team has been helping many of these type of situations and may be of help to you.
These are all great comments. Please keep them coming.
For the two auctioneers that have commented, what happens to the marketability of an asset if an auction is held and no one bids? Have you diminished your marketing and negotiating position by going the auction route?
Second, for the successful auctions you’ve held can you calculate a comparison of how achieved auction pricing compares to what a sealed bid process would have achieved?
Having spent 8.5 years as an institutional broker, I always thought the auction format would achieve the highest pricing (for desirable assets). However, my biggest fear was that we would hold an auction and no one would bid. After that, any re-marketing effort I undertook would be seriously compromised.
Having been involved with oral outcry auctions, sealed bids and requests for proposals for both real estate and debt since 1993 I find the accelerated marketing process a continuum. We market assets aggressively before the actual auction (and often find if we have only a few qualified bidders we and the seller might decide to sell the property before the actual auction). If there are a number of qualified bidders we will hold the oral outcry auction. If the property does not sell at auction (usually because the reserve is too high for bidders) we continue to market the property after the auction (often to new potential buyers as well as previous auction buyers) and can have success after the auction, as well. The auction process gives a true all cash market value to a particular asset (i.e., what a qualified buyer is willing to pay on an all cash non contingent basis). We are finding in this market, that seller financing and pre-qualification/assistance for financing are necessary for successful auctions due to the lack of current debt financing available in the market. The hybrid strategy seems best suited for institutional quality assets that may be in demand. Here we do more of a traditional sealed bid process, narrow the field to several qualified bidders who have done their due diligence up front and then hold an oral outcry auction either live or on-line to finish the marketing process. This strategy is best suited to relatively desirable assets. ekaufman@symphonypropertygroup.com.
I agree 100% with David’s comments.
In this upsetting economy, my combined background as a co-founder of Instadium.com as well as practicing banking and finance law in Chicago and Detroit and acting as the former national sales manager of one the country’s largest sealed-bid auctions houses in Chicago.
Sealed Bid Auctions, in this environment, I believe are the best vehicle to create a a scenario of bidding techniques/procedures that maximize the highest returns, independent of market liquidity. While at a former company we had an approximately 95% closing rate. Moreove, as Special Asset Group and know commercial Special Servicers are going to get avalanched with volume, the ability to run a national, regional or local high-intensity marketing campaign, and as Scott correctly points out, different properties command different audience. This is why it’s critical that a successful sealed-bid sale implement a highly charged and laser targeted marketing to the audience/demographics and publications from which the most bidder’s will come from.
I also agree with Scott that the “fear of loss” alone, drives potential bidders to the plate. Where else can you implement the sale of 500 gas stations or 30 former restaurants the country, within 12 weeks, non-negotiable and transparent.
Auctions are very relevant in our current environment. Whether or not brokers decide to use this tool is a personal preference.
As the creator of Cushman & Wakefield’s initial online auction platform, I can tell you it has been a big help in processing dispositions significantly faster. In 2 out of 3 cases, we achieved higher than expected results. We will know more as we close out future deals.
Specifically to your question: Yes, institutional investors will greatly benefit from the use of brokers incorporating auction technology.
Their biggest problem is not securing the absolute highest price for assets in disposition; but rather getting the transaction done. With over $350 billion of distressed assets coming on line, volume will be priority.
Brokers that insist on processing transactions the traditional way will have a difficult time managing volume sales. Cushman & Wakefield processes over $28 billion annually in capital markets: to maintain our market share, we must produce higher volume with fewer brokers.
The auction process is not easy and does not reflect laziness. It is currently the smartest way to meet current customer demands for disposition of distressed properties. Online auctions will not replace our traditional model; but rather enhance it when necessary.
http://www.linkedin.com/in/edwardnwokedi
ed.nwokedi@cushwake.com
Thanks to everyone for the interesting comments. Auctions are here to stay. A lot of investment property, large and small, simply has to be sold by the owners for a variety of reasons. The actual value of a property after an overheated market period is very difficult to gauge. After all a property is worth what a seller will sell for and a buyer will pay. And then consider the time period- money needed now rather than next year when there may be a recovery. Sellers can often set a minimum price. If the Auction house has done the work marketing and the property remains unsold at auction then that is a strong indicator of current value i.e. less than you thought- make an adjustment or be prepared to wait for the market….. Also, due diligence shouldn’t be an issue if the buyer, seller and broker are willing to make an effort. Sometimes potential buyers need a deadline to motivate them into action.