Many people have the perception that an auction is a 'fire sale,' or a last ditch effort to sell a property. In the past, individuals, corporations, financial institutions and the conventional real estate brokerage community have looked askance at real estate auctions. Why is this perception changing? The real reason for the growing acceptance of auctions is that auctions work.

Today auctions are more popular than ever -- even in vogue. Examples of this are Internet auction sites such as ebay, multi-property ballroom auctions and even satellite auction events of high-end properties around the world. Closer to home, thousands of commercial real estate auctions are held throughout the Southeast. Shopping centers, office buildings, industrial complexes, marinas -- you name it -- have all been sold under the hammer.

Real estate auctions have been prevalent for some time in Europe and especially in Australia, where over half of all real estate is sold via auction. People in the United States remember the foreclosures and sheriff sales of the 1930s and 1940s. Public auctions are just beginning to come into their own in the Southeast. In 1984, yearly sales of real estate at auctions nationwide were approximately $500 million, and in 1987, Fortune put the annual rate at $2 billion. The latest published figures by The Gwent Group of Bloomington, Indiana, are at $49 billion for 1999.

This current auction increase is on the coat tails of the Resolution Trust Corporation (RTC) auctions of the late 1980s and early 1990s, where thousands of commercial and residential properties were liquidated. Lenders viewed auctions as their salvation. Indeed, it was an advantageous and efficient way to remove a large quantity of properties from the real estate owned (REO) inventories. The savings and loan restructuring put auctions in a favorable light. The FDIC, GSA, HUD, VA and other government agencies continued using auctions for residential and commercial properties alike. The more commercial properties were auctioned, the more positive results were observed. Buyers, consumers and investors, as well as sellers and brokers, became more knowledgeable and accepting of the auction method. Here's what they learned about auctions:

TIME

Auctions assure a fast sale. The phrase, ¹Time is of the essence,' is epitomized in the accelerated auction process. Auctions create a sense of urgency in the buyer's mind. A typical commercial property will be marketed 4 to 6 weeks prior to the auction date. All prospective bidders must prepare to do business on the day of the auction. If they have sincere interest in the property, bidders must, in effect, ¹show their hand' to play. If a bidder wants that property, he or she must participate in the auction procedures. Buyers cannot ¹wait out' sellers to get a lower price; the property will be sold to someone else. In a demand or sellers market some properties are actually sold prior to the auction. On average, the transaction is closed in 30 to 45 days from the date of sale.

REDUCED HOLDING COSTS

Time is money. Because auctions shorten the entire sale cycle, expensive carrying charges are abbreviated. Costs to hold commercial properties generally range from 1 to 2 percent of value. Taxes, insurance, security, maintenance and debt-service are ongoing expenses to keep any property. Sophisticated sellers recognize how savings in this area directly translates into increased profits or reduced losses. Obviously, time saved equals money saved.

SELLER-STRUCTURED TERMS

The seller determines terms for the auction that meet his or her requirements and selects the ideal time to sell the property based on all pertinent factors. A resort lodge may have seasonal considerations; a manufacturing plant may be relocating; an office complex could be 100 percent occupied with good tenants; a new shopping center has just opened across the street; the seller has a balloon payment in 90 days and wants to take advantage of another investment opportunity. Opportunity costs are often overlooked. Harland Sanders actually auctioned his old motel and restaurant to launch his new business - called Kentucky Fried Chicken.

The seller will also set a date, time and place that is most favorable to him, while still allowing the most qualified bidders to bid. Frustrating negotiations and back-and-forth haggling are virtually eliminated. Most properties are offered on a clean sales contract. This means there are no contingencies in the purchase and sale agreement -- not even financing. The seller may offer owner financing, but most auctions are cash sales; bidders pre-arrange their financial arrangements before the auction. The standard contract will require 10 to 30 percent earnest money at the auction with a portion of that in a cashiers or bank check of substantial amount to lock in the buyer. The earnest money is usually non-refundable. Post auction liability is substantially curtailed as most properties sell ¹as is,' ¹where is' and ¹with all faults.' Auctioneers carefully prepare property information packages with complete information. Buyers and attorneys review documents and inspect the property before the auction. Normal disclosures are made. A big difference in the commercial auction is that the due diligence is finalized before the auction. Instead of making offers subject to contingencies, buyers do their homework prior to the auction.

MARKETING

Contemporary auctioneers are not just melodic, fast talkers who orchestrate the charged atmosphere of the auction itself. The real expertise of these charismatic salespersons is marketing. By using the latest technology and Internet exposure, coupled with conventional advertising and the added impact of the word, ¹auction,' everything is intensified. Excitement is created. A deal may be had. An event is forthcoming. The property with the auction banner across it is now set apart from the hundreds of competing properties that are just ¹for sale.' An auction focuses the spotlight on the subject property, thereby freezing the rest of the market. Who is going to buy that store when the one down the block is going up for auction? Time sensitive marketing is concentrated over just a matter of weeks. Buyer demand accelerates as the auction approaches.

FAIR MARKET PRICE

Auctions are market driven. They stack up well when compared to traditional sales that may dictate average months on the market versus 30 to 45 days on the market for the auction. Properties properly marketed and auctions professionally conducted will bring current market value. The competitive bid arena is an effective method to determine real value with real offers. Uncertainty about pricing is eliminated. BPOs and appraisals are not necessary. If a commercial property -- with or without improvements -- can be divided into parcels, it enjoys another distinct pricing advantage. Some things can be done at an auction that are impossible otherwise. The property can be subdivided and offered in individual parcels or tracts, as combinations of parcels and as a whole, utilizing various devices or multi-parcel offerings.

Jim Bramblett of Re/Max Group Auctioneers in Elizabethtown, Kentucky, has perfected what he terms the Multi-Par Bidding System, an innovative and efficient means to increase competition among single parcel and combination or whole property bidders. This system was used in an industrial offering in Atlanta that grossed $1.7 million. The property brought almost $300,000 more by offering the buildings and land in different configurations to accommodate bidders with different purposes. The bottom line is the Multi-Par Bidding System attracted more interested bidders, thus garnering more bids and yielding the seller more money. Occasionally properties have sold at auctions for more than the last listing price. Can you imagine a seller receiving more than he was originally asking? Why would this happen? Because that's where the market truly was at that given point and believe it or not, some properties are priced below the actual market value. Competition between willing and able buyers demonstrates the highest possible present market price. An auction is the pure, free enterprise system at work in the real estate business.

BUYERS LIKE IT

Buyers like the public auction forum because they can see who the competition is. Knowing the players may be helpful in gauging their financial strength to bid or in determining how the property may be used or further developed. Every time one party bids, it reinforces everyone's evaluation of what the property is worth. Bidders only have to bid one increment above the last bid to be the winning bidder. Buyers are not fearful of paying too much, and they like the assurance of not putting too much money on the table - it is a fair transaction for both sides of the sales equation and accurately reflects the marketplace. Buyers also like having all the due diligence and salient facts about a property available to make a timely decision. In a short time frame and without dickering on terms, conditions and price, they know if they are successful in buying the property. If they are not the high bidder, they can use their resources elsewhere.

In today's rapidly changing marketplace auctions are a growing trend. Buyers and sellers alike are changing their attitudes about auctions, and the reason is simple: auctions work.

Mike Loftin, CAI is with Re/Max Group Auctioneers in Cartersville, Georgia.

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