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Real Estate Auctions

Real Estate Auctions - The Right Seller and The Right Property

Auction- auc·tion (n) a sale of property to the highest bidder. Websters

For centuries Auctions have been the ultimate mechanism for establishing values and facilitating quick and fair exchanges of goods and property all over the world. Recorded history describes auctions as early as 500 BC and auctions were said to be the primary means of sales throughout the Roman Empire. Considered at one time to be appropriate only for distressed property, a larger percentage of the value of real estate and commercial assets are being sold at auction than ever before. Some studies suggest that by 2010, close to 30% of all real estate sales dollars will be generated by auctions. Not every situation is ideal, however an auction is an excellent way to sell property when the Seller has some motivation to transfer ownership for the highest price the market will bear within a specific timeframe.

Rule # 1 - The Right Seller

To determine if a property is right for auction you have to look at one major factor. The Seller, not the property, is the key ingredient. As in a general brokerage transaction, it must be determined if the Seller has the ability and the motivation to sell. Certain questions must be answered. Ø Can the Seller afford to accept market value? Sometimes the value of an asset is below the debt level as is common with the 120% mortgage. Ø Does the Seller have the true desire to accept what the market will bear? Perceived value is not relevant. Value is established by what the market is willing to pay. Often, the market exceeds expectations, however sometimes it does not. If your answer to that first question is yes, then almost any property is right for Auction. A good Seller in an Auction situation is someone who has a compelling motivation to sell. The best Seller in an Auction situation can detach any personal feelings from the asset while making a selling decision based upon financial factors. These are people who, when provided with evidence of the market, will accept what the market tells them. In a general brokerage situation a Seller or Broker will set an asking price that he or she feels is reasonable and in line with the market. The property is advertised in the newspaper, in local and regional real estate publications, through e-mail to colleagues and on the Internet. If the property does not sell, one of two events may occur. Ø First, the listing may expire. The Seller could decide to keep the property or to re-list it with another Broker. Ø Second, the Seller may decide to lower the price to attract Buyers. In an Auction situation an Auction Firm offers the property to the market with a defined set of rules which are determined through suggestions by the Auction Firm but ultimately decided upon by the Seller. An Auctioneer will ask the market what it will pay for an asset based upon those rules. On Auction Day, providing the Auctioneer does not receive acceptable pre-auction offers, the property will realize what the market is willing to bear. The Seller now has a choice to make. Does the Seller have the ability and willingness to sell for what the market is willing to pay?

Rule # 2, The Right Property

While all types of properties can be sold at Auction, some are better than others. A good prospect for Auction Sale is an owner who truly needs to sell. This might be the trustee of an estate, a bank, retiring company owner or someone in a “sell to buy” situation. All of these individuals have a desire to sell and to sell as soon as it is financially possible. Their properties range from single-family residential to large commercial assets such as shopping centers or industrial machinery.

Out of all the potential properties and Sellers in the marketplace, the absolute best auction scenario is one you probably would not even think of. It is the property you think you can sell with little effort; the property that will have multiple offers as soon as it is placed on the market. Picture this scenario. A Seller has a piece of land in an area that is being quickly purchased by developers. The goal is to sell the property for $500,000 and to settle in 30 days. You have spoken to these developers and know that as soon as this property is available at least three of them will make purchase offers. No problem, right? When all the offers come in one is for $400,000 with a $10,000 deposit and will close right away, one is for $475,000 with a promissory note that will close in 45 days and the last one is for $520,000 with a $25,000 deposit and a 90-day feasibility study contingency. Which one do you accept? Which one do you counter? An Auction levels the playing field. The Seller and Auctioneer outline the rules, write the contract that is acceptable prior to the Auction, and offer the marketplace the opportunity to make an offer based on those guidelines. Another scenario. You are a Seller in a hot residential market. You own a house in a neighborhood that is seeing multiple offers at asking price. Who is the best Buyer? Which contract do you accept? How high do you counter? If that Buyer would not go that high maybe the other ones would have, but you are already negotiating with Mr. and Mrs. Smith. The answer here could be an Auction. How about a unique property where value is difficult to establish? Did you know that celebrities and other high end homes are among the most common residences auctioned? What about something with a limited market? If the MLS remarks should say “For that special owner, an opportunity to own the only home in the United States with over 5000 SF, no windows and pink siding” an auction might be the answer. Other properties that are good for Auction are properties with a steady income stream, such as shopping centers, hotels, or resorts. As we all know, these assets may be on the market for years before a ready, willing and able Buyer makes an acceptable offer. When that Buyer does make an offer it will be based on the income stream of the assets and offset by any needed maintenance and other operating costs. To sell this property in a reasonable amount of time you may need to force the market. The Bidder Pool At any given time there are thousands of individuals looking to purchase thousands of properties in the United States. For example, let’s assume a Real Estate Investment Trust is looking to buy a shopping center somewhere in the United States to satisfy a hole in its portfolio. Let’s also say, for the sake of discussion, that there are 200 shopping centers in the country that match the REIT’s buying criteria. Which one will it look at first? How do you get it to look at yours? The same thought can be extended to a residential property. Right now there are thousands of homes for sale in the Columbus area under $50,000. One way to get a diverse group of Buyers to look at your Asset before all the others is possibly to offer it at Auction. Think of yourself as a Buyer. If you had the choice to buy a property at Auction, with the chance of getting a “deal”, wouldn’t you consider it? Don’t get too excited though. The reality is that the property never sells for $1. Richard Kruse is the president of Gryphon Asset Advisors, a multi-faceted asset recovery and auction firm based in Columbus OH. His real estate experiences range from single family homes to shopping centers and development land. Mr. Kruse can be reached in his office at 614-885-0020 x 17.

Richard F. Kruse is the President of Columbus, Ohio based Gryphon USA, Ltd. (www.gryphonusa.com). The Gryphon Organization includes Gryphon Asset Management providing receivership and consulting services in the distressed marketplace, United Country Ohio Realty & Auction Group (www.ucohiorealty.com & www.ucohioauctions.com) providing real estate brokerage and auction services throughout Ohio and OnlineAuctionUSA.com (www.onlineauctionusa.com) providing commercial asset liquidations from the Midwest to East Coast.

United Country Ohio Realty & Auction Career Opportunities Available. Call 614-885-0020 x 17

Posted by Rich Kruse on 09/18/2006 08:46 PM

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