How Does A CRE Auction Work? A Guide For Brokers And Sellers
As the industry emerges from a coronavirus-related freeze in the markets, commercial real estate could see an influx of deals in 2021 and 2022 as sellers, lenders, institutions and high net worth owners seek to liquidate assets across their portfolios. Given current trends, many more of those deals could be conducted through online auctions rather than traditional managed sales.
While auctions are a well-established way to sell and purchase commercial properties and notes, many buyers and sellers in the industry have yet to experience a property auction firsthand, particularly through an online marketplace. Bisnow spoke to sources at LightBox, whose RCM platform is recognized as the leader in commercial real estate investment sales, to build a guide to online auctions for newly initiated brokers and sellers. Read on to see how online CRE auctions work, their benefits and why 2021 is an ideal year to use a digital platform to buy and sell properties around the world.
The Increasing Relevance Of Online CRE Auctions In 2021
Online CRE auctions may be more beneficial than ever, with distressed properties from numerous sectors projected to enter the market in 2021. With many investment groups coming into the year with capital in hand, the new availability of diverse properties presents unique opportunities for post-pandemic investment across the country.
“Some property owners have loans that are maturing in 2022 and may have trouble refinancing their assets,” LightBox Managing Director of Auction Services Justin Latorre said. “Some financial institutions are also ready to dispose of assets for a variety of reasons. Buyers have raised money and the inventory will be available. Online CRE transactions have the ability to restart the machine, getting assets moving and money flowing again.”
Even with the renewed emphasis on auctions, managed sales are likely to rise through 2021 as well. The RCM platform provides CRE workflow solutions that facilitate digital auctions and managed sales. The team provides support to more than 50,000 brokers, helping them bring assets to market for over 80,000 active CRE buyers. LightBox Senior Vice President of Broker Operations Tina Lichens said that auctions are not competitors to traditional managed sales but rather another strategy for brokers to consider as the endgame of a marketing campaign.
Getting Assets Prepped For Auction
Brokers that use an online auction platform may remove some of the uncertainty that surrounds a traditional managed sale. An auction can provide certainty of close, detailed and transparent due diligence about the property listed, and the potential to secure better market pricing from qualified buyers.
Latorre said that a LightBox auction attempts to amplify these benefits by thoroughly marketing the property prior to sale.
“We work with the brokerage to identify the asset and make sure its story is a suitable candidate for an online auction,” Latorre said. “We aim to drive success for all parties involved, not just the seller. We place the brokerage front and center while considering how this opportunity will best benefit the buyer.”
The onboarding process involves four to six weeks of marketing, allowing buyers to complete their due diligence. This includes providing third-party reports such as environmental assessments, property condition reports, surveys of the property and the seller’s purchase agreement.
The broker receives detailed analytics that track how many bidders have viewed the listing, registered for the auction and uploaded proof of funds. The result is a 360-degree view of the asset for potential buyers and confirmation for the broker that qualified, motivated buyers will be participating in the auction.
Going Live With A LightBox Auction
A LightBox auction typically lasts for 48 hours, with the majority of the bidding completed in the final few hours, Lichens said. Once the reserve is met, all bidders are notified and given the opportunity to increase their bid by incremental amounts, ultimately driving additional profit for the seller. Although assets auctioned online have the potential to substantially exceed the reserve price, this doesn’t necessarily deter buyers.
Lichens described an office asset being sold in suburban Boston that met its reserve price but saw a bidding war continue long after.
“Initially, two bidders went back and forth several times, with a third entering the bidding late and driving one of the original bidders even higher," Lichens said. "Eventually, one of the original bidders won the auction with a bid of $4.35M, which was 45% over the reserve price."
The LightBox team feels that this process democratizes the auction and leaves buyers satisfied that the final purchase price was fair. After the auction, buyers have 24 hours to submit their nonrefundable earnest money deposit. Most assets will receive a 30-day closing period while larger assets or cash-only auctions may receive a negotiated 60-day close. Typically, the full LightBox auction process from broker engagement to close of sale takes fewer than 90 days.
Executing Auctions And Managed Sales Virtually
Lichens suspects that there may be a backlog throughout 2021 as distressed properties are processed. The projected delay in asset availability could make solutions like the RCM LightBox auction platform a preferable solution for all parties, especially brokers who seek a certainty of close during an uncertain CRE climate.
“We’ve spoken to large CRE owners who initially planned on being net buyers in 2021,” Lichens said. “Instead, they’re now considering being net sellers."
Though Latorre believes that a digital auction platform is a resource that brokers should always consider when determining their go-to-market strategy, he said that certain assets are better served through a traditional managed sale.
“An auction offers more benefits for a number of sales, but not every sale,” Latorre said. “We want brokers who prefer the traditionally managed sale — a method that’s no doubt been a historically successful strategy for many brokerages — to know that LightBox is here to facilitate those transactions just as efficiently and effectively, for the highest price possible.”
This feature was produced in collaboration between Studio B and LightBox. Bisnow news staff was not involved in the production of this content.
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