‘5 Questions With’ Mark Abood, Senior Vice President of Colliers International
1. There are various myths associated with commercial real estate auctions. How does a property make it to the auction block?
I always describe an auction as “an exclusive right to sell, but for a very short period of time.” There is a misperception in the market that auctions are only for distressed or troubled assets. In fact, an auction can be a great alternative marketing strategy not only for troubled assets, but assets that are hard to value, unique one-of-a-kind assets, assets that are performing well, or assets where there is a great deal of demand. It’s more about the situation than the asset. In some parts of the world, auction is the predominant method of sale for real estate. Any asset can make it to the auction block, in any market, good or bad!
2. Why would municipalities be interested in local auctions? Can auctions be used as an economic development tool and if so, how?
Auctions offer government entities a fully transparent process to sell their real estate. Transparency is very important. It insulates a seller from being scrutinized for favoring one bidder over another. It creates a fully level playing field. In fact, legislatively, it is often required for entities such as school boards in Ohio to offer their real estate via auction. It is also an excellent tool to create demand and invite many different user types to bid on a particular asset. When you have multiple user types, you have more competition. More competition means higher price!
3. What does the auction process entail and how long does it usually take?
The auction process is more sophisticated than most people think; there is a misperception that a seller just offers up the property via auction and we all just hope for the best on auction day. In fact, a great deal of planning, preparation and strategy is involved in offering an asset to the market. There are also many different types of auction strategies, including seller reserves, absolute, buyer’s choice, parts and whole, progressive bidding, sealed bid, live and online bidding. I am a proponent of live auctions for many reasons. The process can take as few as four weeks or as long as two months, depending on the seller’s goals and where the buyer pool might be coming from.
4. How do some sellers use auctions as a first resort rather than a last resort?
Some sellers choose to offer their property via auction as a first resort and I think that is a brilliant strategy. When selling traditionally, a seller will usually share an “asking price” which could scare away some buyer prospects. However, in an auction, the buyer determines the ultimate price they are willing to pay for a property and everyone is invited to the table. More competition means more bidding and therefore higher prices! Also, a seller may not to wish to share a perceived value with the market, so bidders will have a very broad range of valuations in their minds as they approach the auction date. They sky becomes the limit! I have also heard that some sellers do not wish to deal with long contingency periods, buyer brokers, buyers changing the terms at different points in the due diligence timeline, and attorneys taking weeks or months negotiating the purchase agreement.
5. What are the most challenging aspects of purchasing commercial real estate at an auction and what are the risks to the buyer?
There is a tradeoff when buying a property at auction. A buyer gets to determine the ultimate price they are willing to pay for a particular asset, but the seller controls the terms, timing and due diligence presented. So, there is risk to a buyer. That risk is balanced by the buyer’s control over price. If there are unknowns or concerns that a buyer has, they should take that into consideration when bidding.If you are the high bidder, you are obligated to close or face significant costs. However, I will argue that a property will sell for what it’s worth, regardless of whether a traditional marketing program is utilized, or whether the asset is offered via an auction marketing program. In the end, sellers desire to sell, and buyers wish to buy, and an auction is the most effective and timely way to achieve those two goals!