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What’s Right about the Real Estate Auctioning Business Model?

As a follow up to my earlier discussion about “What’s Wrong with the Real Estate Auction Business Model,” let’s talk about what the advantages are of pursuing this commercial real estate sales property exit strategy.

By definition, auctioning “best practices” produce market offers (prices) at specific (static) points in time (date).

In my earlier piece on “What’s Wrong with the Real Estate Auctioning Model?” I explained what I believe is wrong with the traditional property listing model. In the traditional listing model, sellers typically overprice their property and passively wait for the market to engage them.  National Association of Realtor (NAR) studies consitantly report that over 80% of sellers dictate the listing price of their home to their agents prior to listing. While there is no similar data available on commercial real estate brokerage practices, this implies that less than 20% of all real estate agents are either trusted regarding their pricing recommendation or disagree with their clients perception of value.  The apparent acquiesence of real estate professionals to sellers regarding the value of their properties (listing price) in the majority of cases is fine in a good market, but can be disasterous in a poor one. This is even more exacerbated in this real estate downcycle by the unprecedented (structural) economic events (Circa 2008), and those events debilitating effect on commercial property values in both the short-term and foreseeable future.

This approach does neither the client nor agent any good as the property languishes on the market, as both client and agent chase the market down through price reductions in utter frustration (Circa 2008).  By the way, this traditional real estate listing pricing model is known as a “Dutch Auction,” an auction where the seller starts high and takes the first lower acceptable offer.

In my opinion, the biggest single advantage to the auctioning approach is that it produces “true market” offers more quickly, regardless of market conditions. The auctioning approach changes the dynamic of making an offer to the favor of buyers.  Instead of a seller pricing a property high and challenging buyers to "make offers" under the traditional listing approach, auctioning allows the seller to price low, and empower buyers to challenge them (sellers) to "accept their offers."

This reversed dynamic accomplishes two things.  One it creates a comfort zone for buyers to engage sellers directly and "make their best offers" for the property without feeling as though they are wasting their time or insulting the seller.  Two, auction methodology also intrigues and attracts the "fringe" buyer that is capable of purchasing but is perhaps not actively looking at properties (and posibly not represented).

Fee structure aside, the non-distressed auction model can increase the likelihood of a direct sale to an unrepresented buyer and potentially reduce transactions fees (commissions). The auction process also compresses (accelerates) the property sales cycle, flattens the lines of communication between buyers and sellers, produces more qualified buyers than the traditional listing process, increases sellers’ returns on their advertising (ROI), and is a true indicator of a properties given market range of value.

Let’s discuss these advantages individually.

First, the non-distressed auction model is a “proactive” marketing approach that targets the consumer ("Buyer Pool") directly in addition to the commrecial real estate brokerage community.  Whether it is that those who attend auctions are more likely to be direct buyers (unrepresented), the end-user targeted direct advertising campaign promoting the auction, the current resistance of the brokerage community to embrace the auctioning model as a legitimate sales mechanism, or a combination of all of the above, most bidders today are unrepresented by brokers (they have attorneys).  In these cases, the seller saves money on outside fees and can be more competitive on sales price. Thus, another advantage to the non-distressed auction model (5 Day Sale style) is that it is more likely to result in a direct sale.

Second the auction process compresses (accelerates) the property sales cycle because the auction is held on a specific date.  The property is intended to be sold on that date, thus creating a sense of urgency for the interested buyers.  When compared with the traditional real estate “Dutch Auction” listing approach described earlier, the auction model generates a timely sale, which allows the seller to benefit by avoiding additional carrying costs, exposing themselves to increased market pricing risk, and a shrinking buyer pool, given our deteriorating national economy and tightening credit at the retail mortgage levels.

The theory of the “Time Value of Money” applies to real estate transactions as well as cash.  In a market such as ours (Circa2011) a sale today is worth more than a sale tomorrow for most sellers.

Third, the auction model – while relying upon the support and counsel of real estate/auctioning professionals – promotes direct dialogue between sellers and buyers.  This facilitates the constructive exchange of information (unfiltered by intermediaries), and the process can be a more consumer friendly one from the buyers perspective.  This process also allows sellers to benefit by having “the market speak directly to them,” as bidders share what they like about the property or debt instrument, do not like, and market details about other commercial real estate offerings they may be considering.  It’s one thing for the sellers’ brokers to “debrief” clients after getting showing-feedback from a buyer's agent after a property showing, but it’s even more illumiinating for a seller to get direct feedback from buyers in real time.  Seller’s gain near perfect information regarding bidders’ interest, and, a rapport can develop between buyers and sellers during the physical inspection process prior to the auction that can be helpful when finalizing the terms of a sale.

Fourth, those attending auctions under formal auction models (where bidders are required to post “good funds” earnest monies to be eligible to bid), or less formal auction models such as the 5 Day Sale methodology, those participating in real estate auctions are usually financially qualified and more likely to be all-cash buyers.

Fifth, when run correctly the auction model is the best real indicator of a given properties true “market range of value” at a given point in time.  Appraisals, comparative market analyses, brokers’ opinions of values, they are all “well-informed guesses” based on historic sales data and a given real estate professional’s market perceptions and value opinions.  The auction model identifies a pool of buyers (the “Buyer Pool”) at a specific date (static point in time) and then facilitates their (buyers) ability to compete for the subject property.

Sixth, the auction format increases seller’s return on investment (ROI) on his/her advertising dollar. In a soft market, all properties become commodities (with many substitutes) and a seller’s given real estate ad that advertises prices near or above the "market range of value" gets lost in the crowd of similar real estate offerings, regardless of advertising medium (print, online, etc.).  The fact that the auction format begins with a significant “discount-to-market” via “starting bid price” distinguishes the property from all of its competitors, garners viewing, gets clipped by potential buyers, has increased shelf-life, creates a "buzz" in the marketplace, and is therefore more effective in generating qualified market interest.  If the advertising is more effective in generating above market interest based on pricing, then the return on investment (ROI) is greater than traditional real estate advertising with offerings priced at or above market.

In closing, anyone considering pursuing an auction or "accelerated property marketing" strategy for their commercial real estate (or debt offering) in a soft market should weigh the “cost-benefit” of conducting that sale given the price point of their property (or debt offering), market realities, and  historic price expectations.

Kyle Cascioli
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