With an increasing number of distressed commercial properties heading to auction, a well-run auction process will be important for ensuring that both buyers and sellers reach their goals. This week, MortgageOrb spoke with technology entrepreneur Joe Tang and real estate developer Keith Yang, co-founders of AuctionPoint, an online auction platform specifically designed for commercial real estate.
Q: With the scarcity of transactions in the market and general pricing uncertain, how are brokers setting initial bid prices? Do you expect this process to become easier as more pricing standards are set by previous auctions?Â
Joe Tang & Keith Yang: Setting an attractive initial bid price is one of the key components of running a successful auction, and several factors influence this decision. For the broker, the lower the starting bid price the better, as the deal is more likely to sell.
The prospect of selling an asset at too low a price can scare a seller. But provided that the broker does his or her job of marketing the auction correctly, and there is healthy bidding for the asset, the end price takes care of itself. In other words, as long as the right bidders are participating in the auction, fair market value will be achieved.
In theory, each auction could start off at $1 to maximize bidder participation. However, that is unrealistic for high-priced assets like real estate, given how long each auction would run.
Currently, we are recommending that brokers estimate current fair market value, then start the bidding off at about 40% of that value. We find that to be a good rule of thumb, and it has been successful to date. The process of setting initial bid pricing will become easier as we accumulate more data from prior auctions.
Q: Are large gaps – such as the 49% difference mentioned for one of your recent auctions – between initial bid price and final winning price expected to continue with future auctions? What adjustments might take place, especially in response to shifts in the market?
Tang & Yang: To date, we have seen the gap between initial bid price and winning bid price range between 20% and 50%. The magnitude of this gap depends on several factors: initial bid price, asset value, and the number of bidders.
A higher spread between starting and final bid indicates to us that an attractive start price was set and that the brokers were able to create healthy competitive bidding for the asset. These are some of the indicators of a successful auction, and at the end of the day, maximum asset value.
We are hoping to see more auctions with higher spreads between the starting price and the asking price as the market gains a better understanding of how auctions work, and as brokers get better at auction-marketing.
Q: Who is buying distressed commercial properties right now? In general, which types of firms/entities are taking the lead in jumping back into the market?
Tang & Yang: All types of buyer classes have been attracted to the auctions thus far. However, individual and private investors have most quickly embraced the auction model because they have recognized the immense value.
As the larger institutions see individual and private buyers profiting from buying at auction, they are likely to follow. There is a tremendous amount of capital waiting on the sidelines, and buyers don't know when they should jump in. Everybody is waiting to time the markets.
Auctions are a terrific way of presenting historically low valuations to buyers and creating a sense of urgency to act before opportunities are gone. We see auctions becoming a common way for all classes of assets to be sold in the coming years.
Q: Are buyers' financial credentials included in buyer pre-qualification? What determines a bidder's eligibility?
Tang & Yang: Using the AuctionPoint platform, bidder qualification is completely under the control of the listing broker. When the asset is relatively small and there is no sensitive information to protect, brokers may choose to qualify bidders by collecting a small winner's deposit prior to the auction date.
As the deal size increases and the number of potential bidders decreases, the qualification procedure gets more involved. For instance, the broker may require review of financial statements prior to allowing participation by a potential bidder. The broker is always trying to find the right balance between encouraging as much bidding as possible and making sure that the parties bidding have the ability to close the transaction.
The platform allows the broker to determine the qualification procedure on a property-by-property basis. For instance, for larger transactions, the winner's deposit could be set at a very high amount so that the winning bidder can't back out of the transaction after winning at auction.
Q: Looking at commercial property distress more generally, which sectors do you see as being hit the hardest right now? Which might recover soon?
Tang & Yang: The distress is pretty pervasive. We're auctioning a broad spectrum of properties right now. Having said that, we're approached quite frequently by commercial condominium developers – which mirrors what happened in the residential markets.
Several years ago, as it became tougher to underwrite deals as for-lease developments, many deals were underwritten as for-sale condo projects. These include office ‘air-space’ condo projects and industrial condo projects.
Many of these projects were developed two to four years ago. In some instances, the developer was able to sell some of the units, but then got stuck holding a lot of the units when the market took a nose-dive two years ago.
