In today’s fast-paced, economically challenging times, savvy sellers are looking for smarter, faster and more efficient ways to derive maximum value from their assets — and real estate professionals are trusted advisors on the best way to achieve that goal. Although the popularity of auctions has grown exponentially over time, the process is not always understood by those who have the most to gain from it. Even the most knowledgeable corporate real estate professionals, attorneys and lenders may benefit from fully grasping the financial advantages of a professionally conducted auction.

Among the many ways to sell commercial and industrial properties, there are several reasons why one may choose to partner with a professional auction company. For example, some do it to package and sell multiple properties with one marketing effort and guaranteed sales within the same day. Others might want to relieve themselves and their clients of aging listings that have been racking up holding and marketing costs with few buying prospects in sight. Still others bring in an auction company as a value-added service for clients whose needs are better suited to an auction than a negotiated sale.

Whatever the reason for teaming up with an auction company, real estate professionals should expect to receive compensation resulting from the sale of the property, which creates a win/win situation for all involved.

Increasing Popularity

While auctions were once considered a last resort for disposing of distressed property, they have entered the mainstream as a viable alternative to the traditional brokered sale. The increasing popularity of the auction method of sale can be attributed to one simple fact: auctions work. Simply picking up the Sunday newspaper, The Wall Street Journal or even the duPont Registry, one can note the popularity and effectiveness of auctions across a variety of sales situations.

In recent years, the auction method has been used more often for its ease of use and quick results for both sellers and buyers. Whether selling an office complex, industrial warehouse or commercial development property, auctions have proven to be a fast, efficient method of selling assets for maximum value, eliminating holding costs and getting cash in hand.

Individuals, corporations and savvy real estate professionals are now often choosing the auction method of sale as their first option, recognizing that selling at auction offers a quick sale, eliminates long negotiations and often brings as much or more value than brokered sales. In fact, auctions are used to sell everything from large industrial and manufacturing plants to trophy residential estates to farms and acreage. The National Association of Realtors predicts that within the next 7 years one in three properties will be sold via an auction.

The following chart illustrates the explosive growth in real estate auction sales over the past 20 years.

The Auction Advantage

Disposing of real estate via auction offers many advantages to the seller as well as the buyer. “An auction is the only method of sale where the seller knows the specific date on which his or her property will sell,” notes Rob Strickland, vice president of real estate for Furrow Auction Company of Knoxville, Tennessee. “It eliminates negotiations and contingencies and forces buyers to act. The sense of urgency generated by the auction method of sale creates competition amongst prospective buyers and forces values upward.”

Another major advantage of an auction is the elimination of carrying costs. Months and sometimes years can go by before a prospect delivers an acceptable offer on a piece of property via the traditional brokerage method of sale. During this time, taxes, insurance, maintenance and association fees can add up to thousands of dollars. A professionally conducted auction can turn real estate assets into cash in 30 to 45 days and can eliminate much of the cost associated with holding a property for an extended period of time.

Buyers also benefit from acquiring property via auction. They are comfortable in the knowledge that the owner is fully committed to selling, and they compete in an open and fair environment for the privilege of owning the property being sold. This comfort level that bidders have generally facilitates higher bidding.

“With an auction, we have to complete all due diligence prior to the sale,” says Strickland. “This consists of anticipating and answering each and every question a prospective bidder might have about the property we are selling. We make all of this information available to our bidders prior to the sale, so that when they arrive on auction day, all of their concerns are answered and they are prepared to bid top dollar for the property.”

The Value-Added Auction Process

A professionally conducted auction is more than just posting signs on a property announcing a date and time. It requires a sophisticated marketing plan designed to attract the maximum number of qualified buyers in a condensed timeframe — typically 30 days or less. This high-impact, high-visibility auction marketing campaign includes property brochures, compelling newspaper, trade publication and magazine advertising, creative public relations efforts and detailed Web-based marketing.

Terry Bazzoon, director of marketing for Furrow Auction Company, emphasizes that creativity is the key. “Every auction situation is unique and must be treated thus. You can’t take the cookie cutter approach and expect to be successful. One of our first tasks when we conduct an auction is to search our database of potential buyers. This database has been built and refined over 34 years in the real estate auction business. We market directly to all of the individuals in our database that meet the property type and geographic criteria associated with the property we are selling. We also send our specialists into the community where the property is located to conduct personal meetings with bankers, real estate agents and investors to make them aware of the auction event. When you couple this hands-on approach with all of the traditional marketing tools, it creates a very powerful message and attracts large, qualified crowds to our sales.”

Bazzoon also notes that professional auction marketing campaigns can be designed to attract local, regional, national and even international prospects. Many potential buyers would not be aware of the buying opportunity if marketing campaigns relied on traditional methods of real estate marketing.

Effective marketing comprises but half of the value-added auction process. The second and equally important task is thorough due diligence. The old axiom, “The devil is in the details,” is never more true than with a real estate auction. When marketing kicks in and begins generating interest, prospective buyers are going to have questions — lots of them. Answering their questions in a timely and effective manner is the key to generating maximum value for the property. Due diligence in the auction business is significantly different from a traditional brokered sale, when the process typically begins after an offer is made. This can result in a “no-sale” when an issue is discovered that the buyer cannot accept.

Stan Walls, project manager at Furrow Auction Company, describes the due diligence process. “We disclose everything we can about a property. This may include utility and tax history, soil sampling, environmental condition, roof condition, sub-dividing of property, negotiation and installation of roads, title work, surveying, and inspection of mechanical systems just to name a few. Just as with marketing, you have to adapt your methods to the auction opportunity at hand. Every property is different, and the information you have to get out to the buyers is unique for each project. If you do your homework, though, it results in higher values on auction day, which is the name of the game.”

Selling Commercial Property at Auction

Because of the accelerated marketing process that an auction affords, the seller will receive the funds from the sale faster than with a traditional brokered sale. This ability to sell property quickly, before equity value erodes, is a driving force behind the rising popularity of selling commercial property at auction. Taxes, insurance, maintenance and other carrying costs can significantly erode value over time. When you couple this with the inability to reinvest the value tied up in an asset, the auction method of marketing provides a powerful tool by which owners can extract the value from real estate assets quickly, and reinvest that equity into other areas of their business.

“Real estate professionals and their client companies and commercial property owners are definitely recognizing the value of a professionally conducted auction. We have seen a dramatic increase over the last couple of years from individuals wanting to learn more about the auction process,” says Strickland. “Education is the key. Once you explain how the process works, people can clearly see the advantages of an auction versus selling via the traditional brokerage method.”

Marketing of property via auction is on the rise as real estate professionals, estate planners, attorneys and financial institutions recognize the necessity of selling a property before the equity value erodes. There are countless examples of success stories where auctions brought results that exceeded that of traditional sales methods. The buying public seeks out auction opportunities as a way to buy property fairly and without the pressure and hassle of negotiations. By many measures, there is no better way to sell property quickly and achieve fair market value.

Chuck Fisher is director of marketing and business development for Furrow Auction Company in Knoxville, Tennessee.

©2002 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.