Back to the Future – A New Era of Auctions?

What memories do cassette tapes, boom boxes, walkmans and fax messages on slick paper that mysteriously disappear over time evoke for you? It has been a long time since auctions of commercial properties, especially parking garages and lots, have been commonplace. Back in the late 1980’s and early 1990’s, you might recall (for those of us old Selling Your House Quickly enough to remember) the Resolution Trust Corporation liquidated what seemed like at the time an endless amount of real estate. One of its most used techniques was the good ‘ole auction where you could barely understand the auctioneer and his cronies were cajoling bidders like an “Up With People” concert to raise the price one more time.
Well, we might very well be entering a new era of auctions. With banks stuck with “toxic” assets and the real estate market seemingly “locked up,” what better way to get the system running again than a sales method that guarantees a buyer and a seller agreeing to terms on a single day?
PREPARATION:
The Key Ingredient
I had the pleasure recently of reliving this past at an auction of a parking garage located in downtown Atlanta. Since auctions of commercial properties may become more common in the not too distant future and because results of auctions are rarely publicized, I wanted to pass along the results of this sale with the intention of providing some insight on the auction process and some thoughts about how best to capitalize on this marketing technique.
One quick disclaimer, this particular auction was not the result of a forced liquidation or a foreclosure, but rather a multiple party estate looking to monetize a valuable asset. Nor was it and “Absolute” auction. The seller did have a reserve price that was never disclosed to the bidders. Nevertheless, this was an excellent opportunity to refresh my fading recollection of the auction process.
Showing up the day of the auction without doing your homework is not a good strategy.
First, let’s talk about the best way to approach an auction. It is imperative that serious bidders do significant due diligence and homework prior to the day of the auction. Remember, you are going to be asked, at a minimum to put up significant, non refundable earnest money on the day of the auction. You certainly do not want to do that without being certain about all of the important characteristics of the property: title, environmental, physical inspection and cash flow prior to the date of the sale. Committed financing, if necessary for the bidder to close, is also required prior to the date of the auction as the closing will usually take place within 30 days of the auction. Have you tried to line up and close on financing within 30 days recently? This is much different than the typical sale where buyers may have 30 to 90 days while the property is under contract to complete these investigations.
This article is not intended as an exhaustive list for due diligence but rather to promote the idea that showing up the day of the auction without doing your homework is not a good strategy.
As a result of pre-event due diligence, a bidder is going to want to settle on, at a minimum, a range for what he is willing to bid for the property at the auction and, in most instances, set a hard ceiling on what he is willing to pay. The bidder will need to be prepared to stick to that ceiling in the face of the public “encouragement” that is certain to occur at the hands of the auctioneer and his cohorts. Beware, it is easy to get caught up in the fray and raise the bid beyond your pre-event number. This encouragement and pressure is what is euphemistically referred to as “auction fever.”
A savvy bidder is also going to settle on his or her bidding plan prior to the auction. Sometimes, the best bidding technique is to save your bid to the end and only bid once. This is going to be severely challenged by the auctioneer and his team of cajolers. While it would be nice that all bidders arrive with a ceiling in mind, it is entirely likely that one or more bidders will get caught up in the excitement and raise the bid beyond what he or she intended prior to the auction. Another effective technique is intimidation of the other bidders by entering the bidding well below your ceiling and quickly raising the bid each time some one else bids with the intention of making it clear to everyone present that you intend to be the successful bidder and that you are prepared to raise the bid no matter the price.
RESULTS
The auction that I attended was for a garage (192 spaces, not including handicap spaces) that is well located in downtown Atlanta and in close proximity to Georgia State. It had been the subject of a long term lease to Central Parking, but the lease had recently expired and Central continued to lease it on a month-to-month basis for approximately $5,500/month-well below the market rent.
The auction was well publicized both in the brokerage community and in the media. There were approximately 30 bidders present. The bidding began at $1.35 million and quickly climbed to the $1.8 million range. The eventually successful bidder, a well known Atlanta developer and owner of real estate, jumped into the bidding in the $1.7 million range and consistently raised the price anytime another party bid. He eventually “won” with a bid of $2 million. There was a 10 percent buyer’s premium added to the bid amount. Please note that a buyer’s premium is standard in the market and, in this case, increased the purchase price by $200,000.
It was rumored that the successful bidder had the benefit of like kind exchange proceeds (he allegedly sold a property recently and planned to reinvest some or all of the proceeds from the sale in the garage), so there was not the cash or credit restraint on the bidding that one might have expected in this current real estate market.
Another effective technique is intimidation of the other bidders.
Furthermore, it looked as though the bidder had decided before the auction began that he would be the high bidder not matter the price.
I would estimate that of the 30 attendees, about 5 or 6 actually offered bids during the auction. This was not an “absolute” auction, but the auctioneer hinted that the successful bid amount well exceeded the “reserve” amount. Without knowing the exact revenue/profitability of the garage, but relying Top Real Estate Companies Nyc on some pretty credible information, it looks like the buyer ended up paying close to 10 times the cash flow generated by the garage. If this cash flow information is correct, the price paid is certainly lower than what has prevailed in the parking garage market within the last 10 years or so.
It is likely that auctions will no longer be relics of the past. Get ready to do your homework ahead of the auction date and be prepared to prepared to stop bidding.

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