Elements of a Successful Auction, Part V

The Ability to Promote Adequately in the Marketplace

A fundamental difference between the auction approach to marketing real estate and other methods such as ordinary brokerage is the time element. When sellers approach us with an auction assignment, it is not with the idea that they want to sell it “in the next 6 months or so” or “the next year or so” as is usually the case with brokerage listings. When a seller wants an auction, they want it done now!

Realistically, the closest we can do to now! is typically about 30 days. That means 5 days to a week to develop the marketing material, and 3 weeks to implement it.

There are several tools in our kit we can use to get the word out about an auction. The first step obviously is to identify our target markets, based upon the product types, locations, specific and general market conditions, and marketing tool availability (for example, signs are not allowed in certain communities).

Developing the correct marketing mix is an imprecise science; it is based partly upon budget, largely upon past experience, and partly upon gut feelings about what might be effective.

Some items of the marketing campaign are very low cost items, such as signage or ads in Craigslist or email blasts to our internal lists. Some are more substantial, such as a large display ad in a major market newspaper, or a direct mail campaign to 10,000 names in a radius pulled by SIC code, or net worth. Online marketing can run the range from a banner ad in multiple portals to email blasts to targeted lists from industry-specific vendors to developing a Google adword campaign to PR campaigns targeting affinity groups either online or in hard media.

Although it is always possible that an auction marketing campaign can attract sufficient bidders simply by putting up signage on the property and placing the asset on our website and promoting to our email subscribers and our exposure to search engines (a very low cost), it is usually preferable to draw interest from a variety of media by spending some money to reach prospective bidders in places they do business or leisure activities. To that end, we will develop a budget to adequately reach the marketplace.

A marketing budget is very much like an insurance policy. You can spend only a little and on auction day you may not have much protection, or you can spend the optimal amount and ensure that you have reached the market and have bidders there who are ready to compete for the asset.

The ability to promote adequately in the marketplace to get that ready, willing and able crowd is a very important element of a successful auction. Let us show you how!

Elements of a Successful Auction, Part IV

The Ability to Sell for Current Market Price

This section is perhaps the most crucial element of the determinants of a successful auction. It is the area most novices to the auction profession have the greatest difficulty with (ie brokers who are trying the auction model because their model hasn’t been working to well recently).

We receive calls every day from would-be sellers who refinanced their asset at the peak of the market, whose lenders were willing to rely on hyper-inflated appraisals and to often lend amounts far in excess of the asset’s value, so that the owners could take the extra cash out of the refinance and use it for other purposes.

They tell us they have an appraisal which “proves” the asset is worth far more than they can expect to receive for it, and that in any case they now owe far more than it is worth.

Many brokers and other novices to our profession have been to auctions and seen how the price got bid up, and expect that an auction can do the same for them. In other words, they believe that the auctioneer’s gavel is like a magic wand!

In this age of easily obtainable information, bidders can often access mortgage records and sales data and quickly determine if an asset is “underwater”, and because it is well known that the majority of mortgage balances exceed the values of the assets, most private sellers are not good auction candidates.

Until the major correction of the real estate market which manifest itself most strongly beginning in 2008, financial institutions were credible sellers. However, the severity of the downturn has created a situation where even they are often unable to sell for current prices in most markets.

Lenders with sufficient reserves are able to “write down” assets over a period of time as they market them. Given sufficient time, the lenders can sell the assets once the written down book value meets the market. Since 2008, the rate at which most lenders have been able to write down their assets has not been able to keep pace with the downward drop in the market. Thus, in many cases, their inventory of assets has continued to grow, as foreclosures have hit record levels in the same time period.

Also, since many lenders rely on appraisals to justify accepting prices in the current market, they have been hamstrung by the fact that the same appraisers who were telling them the values were unrealistically high back at the peak of the bubble are now slowly beginning to accept the current market conditions. Many appraisers are still attempting to use comparables that are “bubble” comparables from years back, and do not have the methodology to value assets in the present market. This “backwards” approach to valuation may have the benefit of justifying their poor valuations at the peak of the market, but are of little help in the current market.

As auctioneers with a long history of selling assets for cash, we know the cash values of real estate better than the brokers and appraisers who have been contributing to the financial bubble. If a seller is unable to sell for the current market price, it is our duty to inform them of that, prior to engaging our marketing services. We do not believe it reflects well upon the seller or auctioneer to undergo an extensive auction marketing campaign unless they are in a position to sell the asset for the current market price.

You can trust us to get it right!

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!

ARE YOU KEEPING IN TOUCH WITH AMC IN THE SOCIAL MEDIA WORLD?

Please allow me to take this opportunity to throw out a few words about Social Media.

Now I have to admit a secret here and tell you- I am not a particularly social guy! However, I do read a lot of online articles about current events that shape our market, and I do have some interests that I think may be fun for my friends to read. So I think there is a place for a person like me who likes to communicate in writing and has some opinions that he doesn’t mind sharing!

I went to a couple of Social Media presentations, and Marsha attended the SOCON convention here in Atlanta, and I subscribed to Mashable ( a must if you want to understand Social Media), and I have learned a great deal about Social Media, and how it works.

Here is what I have learned so far.

First, there are many, many social media outlets to choose from, but only 4 that really make a difference right now. I say “right now” because in this online world, the rate of change has really accelerated! Here they are:

Linked In- This is an important tool. Why? Because it lets you know who you are linked to that may be linked to others you want to meet! (I say this knowing that my competitors are reading this with a light bulb going off in their heads right now). First, send the Linked In invites to everyone in your address book- that’s right, everyone! You will be surprised to find out that people you know are “linked” to someone you want to know, and Linked In lets you know that! I will talk about the second phase after I do it.

Are you "Linked" to AMC?

Blog- yes, I said it- BLOG! This is so easy to do. Are you producing a newsletter? Then all you have to do is put it in your blog. The experts say you should blog every two week. This coincides nicely with the frequency of a newsletter. The blog should ideally contain only your thoughts, not a cut and paste of someone else’s thoughts. Blogging is free and easy. Link your blog site to your website. More later.

Are You Reading AMC's BLOG Postings?

Facebook- it’s the one I am worst at. Some say to keep business matters out of it entirely. I was an early pioneer in a revolutionary concept called “email” back in the early 90’s and I cant tell you the number of times I got “flamed” for talking about business in email blasts to my own lists of voluntary subscribers. You see, email at that time was only intended for pure esoteric talk about science and academics etc. How THAT has changed! My point is that, as with all media, the traffic keeps changing. Right now we have a “fan page” for our business as well as my personal Facebook page. I still don’t quite “get” Facebook but we use it.

"LIKE" AMC on Facebook!

Twitter- I read in Mashable the other day that only .05% of all Twitter posts account for well over 50% of all Twitter consumption. In other words, if your name isn’t Justin Bieber or Charlie Sheen, your tweet is likely only a lone voice in the wilderness. Then you read stories about people like Gilbert Gottfried and others getting fired for indiscriminate “tweets” and you wonder whether its worth it! But you need to keep in mind that the online world is developing and changing at electron-speed, so I strongly recommend that you learn to tweet! The rule is 140 characters. If you like to tweet about something you read online, go to Bitly.com, it shortens long links to a few characters, I know not how.

Are you "FOLLOWING" AMC?

All of these activities can be linked to your website. Are some of them “fads”? Perhaps. But they will lead to new things, and having a grasp of them will give you a leg up on “the next big thing”!

Jeb Howell

Elements of a Successful Auction

There are many elements required in order for an auction to be successful. These include strong demand, motivated seller, adequate information for a buying decision, an ability to sell at the current market price, and the ability to promote adequately in the marketplace. Not all elements must be present for an auction to be successful, but some combination of these elements must be present. We will address these elements one by one.

Strong Demand

The greatest source of frustration for real estate auctioneers is the perception on the part of many sellers that the only properties they want to consider for auction are those for which there has been absolutely no interest in the course of ordinary brokerage activities. Sometimes, this misperception is even fueled by real estate listing brokers, who may hold the belief that allowing bidders to competitively set the price on a high demand property does not maximize the seller’s revenues.

In fact, nothing could be farther from the truth. It is no accident that the highest prices attained for such diverse assets as fine art, collectibles, Treasury securities, cattle, firearms, and many other asset categories are attained at auction. Whenever we have had the opportunity to sell assets with high demand, we have always outperformed ordinary brokerage prices. Examples include a house we sold for a prominent bankruptcy for $1.05 million where the highest price previously paid in the neighborhood was $400,000, and an industrial building we sold for $2.75 million, over $10/sf higher than any previous sales in the park. Both were cases where the demand proved to be high, and where ordinary brokerage practice would have been to set an asking price based upon “comps” which would have resulted in far lower sales prices. There are many similar examples of this.

If an asset has high demand, an auction will yield the highest possible price, since there is no subjectively determined asking price setting the upper limit.

We love doing auctions of high demand assets. It's where we can really shine!

Why Are Auction Terms Different?

Real estate auctions usually have very different terms than negotiated sales. These differences are manifest in many ways, such as cash terms with no contingencies for financing or inspection (prospective buyers must perform all of their due diligence prior to signing the “as-is” contract), a higher required earnest money (often 10% or more), a quick closing requirement (usually 30 days or less), and a strict adherence to all bidders relying on and agreeing to sign exactly the same contract with no changes.

These strict terms often seem difficult for any but the most knowledgeable and creditworthy buyers, or those with sufficient cash resources to perform. And indeed auctions are not for buyers who are not ready to make a commitment if they are the winning bidder, as the strict terms penalize those who cannot come up with the balance of the purchase price in cash within the set closing period, or who change their minds after the auction. Auction terms are not subject to renegotiation after the fact, so only bidders willing to accept these strict terms should bid at a real estate auction.

The primary reason for these terms has to do with the fact that sellers choose auctions when they must sell the assets quickly, and when they must eliminate as much uncertainty as possible to make sure that a closing does occur and title is conveyed.

By standardizing terms and eliminating all contingencies, the auctioneer creates a level playing field where all bidders are bidding on exactly the same product. If some bidders receive extra consideration that other do not receive, then the auction could not be said to be a fair and open determinant of price.

We have found that auctions are the preferred way to buy real estate for many non-native buyers from other countries who are accustomed to dealing on cash terms. Many of these cash buyers feel that on negotiated transactions, their cultural differences result in them being discriminated against because they do not have the “insider” connections or cultural affinities that native buyers would enjoy. They are much more comfortable participating in auctions, where the only determinant of who buys is the bid amount, not who they know, or who might extend more favorable terms to another bidder.

When a seller chooses to auction an asset, they should be really ready to sell it! When a buyer buys at auction, they should be really ready to close it!