Elements of a Successful Auction, Part III

Adequate Information

A primary difference between auctions and most negotiated sales has to do with the elimination of contingency clauses from auction contracts. In an ordinary contract, such as most brokers use, the buyer puts up a token amount of earnest money, perhaps as low as $500 to $1,000 on a contract for a price that may be several hundred thousand dollars, and allows the buyer a period of time after the contract to do his/her due diligence while he or she “locks up” the property with a contract that may not close.

Because auction terms do not provide for the buyer to be able to change his/her mind and get his/her earnest money (usually 10%) back after the auction, there must be a way for all competitive bidders to obtain all relevant information on the asset prior to bidding on it.

On smaller or less complicated assets such as lots, small rural land tracts, or investment houses, most required information can be obtained from the local tax assessor, planning and zoning authorities, the county building permit office, water/ sewer authority, etc. Bidders often contact the relevant local authorities as part of their due diligence, or we often round up this information for them and provide the resource materials such as plats, tax bills, etc at our website.

On certain assets such as industrial properties or assets where it could be reasonably inferred that there may have been exposure to undue environmental influences, we will recommend that the seller obtain an environmental report prior to our marketing period. This may be a Phase 1 report, and in certain situations a Phase 2 report may be warranted as well.

When available, we also like to post whatever appraisals the seller may have in their file to the website. Appraisals typically include a good deal of due diligence material on the property in their report, including zoning, tax information, neighborhood data, legal descriptions and plats, etc which are good shortcuts for many bidders to assess the asset. The valuation section, while interesting to look at, has little interest to the auctioneer and the bidder, since it is usually a “made up” number using obsolete or inapplicable data.

Other types of information we will post to the website include repair estimates, engineering and/or mechanical reports, soil, drill testing, and/or erosion reports, timber cruises, crop reports, aerials, surveys, rent rolls and operating statements, vacancy status, leases, our detailed terms of sale and auction contract, and any other relevant data which will lower uncertainty for a bidder.

Because we do not sell with a “post auction” due diligence period, it is incumbent on us and the seller to get as much material as possible up on the website for buyers to examine, several days or weeks before the auction date. An informed bidder is a better bidder!

Elements of a Successful Auction, Part II

Motivated Seller

In our previous section, we spoke of strong demand as a very important element of a successful auction. Unfortunately, this scenario is pretty rare in real estate auction practice. The more typical scenario is that the seller typically considers an auction as a last resort, after having listing it unsuccessfully for a period of months or years. In these scenarios, we can pretty much rule out “strong demand” as the factor in achieving success. However, there are other factors which can create the environment for a successful auction.

Perhaps the most important of these is the perception that the seller is truly motivated to sell the asset. This may sound simple enough- normally most sellers, once they acknowledge the fact that they want to sell, are to some extent “motivated” to sell. However, in the world of real estate auctions, perception is everything, and for bidders to undergo the necessary due diligence to commit themselves to an “as-is” contract with no contingencies if they win the bid, there has to be some other factor to attract them to compete openly for the asset.

If the asset is being offered on an “Absolute” basis, with no minimums or reserves, this communicates to the bidders that the seller is committed to the auction process and that the asset will sell. The Absolute seller is definitely the embodiment of a “motivated” seller.

In the absence of an “absolute” auction, bidders also tend to take the auction more seriously if the seller is a financial institution, rather than a private seller, since the perception is the transaction is not “personal” as is the case with most private sellers or investors, and that the financial institution will let it go for the market price determined by the auction. (This is not always the case; it is the auctioneer’s job to make sure that the bank’s desired prices are attainable in the market before accepting the assignment. More on that later!)

Other examples of sellers perceived as motivated include court ordered bankruptcy sales, receivership auctions, estate auctions, corporate liquidations or partnership dissolutions, and any sale perceived to be at the order of some higher impersonal authority such as the courts.

If the property is not a high demand asset, and the seller is either not motivated or perceived that way by bidders, then no amount of auction marketing is going to attract bidders to take the offering seriously and agree to compete for it.

We want to be your auctioneer, but in the absence of a high demand asset, there has to be a credible selling story in order to attract bidders. We will be happy to meet with you to see if your situation is truly that of a motivated seller!