Bidder Best Practices for Online CRE Auctions

Even for many sophisticated and highly experienced commercial real estate investors, the world of online commercial real estate (CRE) auctions is uncharted territory. If you’ve started to investigate this exciting dimension of CRE, perhaps you’ve ascertained how to navigate the process of registering as a bidder for an online CRE auction; developed an understanding of the key differences between these auctions and traditional investment sales methods; and dispelled some common misconceptions regarding CRE auctions. Now, with this nascent base of knowledge in place, you may be wondering how to optimally participate as a bidder in online CRE auctions, such as those conducted by Ten-X Commercial, an affiliate of LoopNet.

LoopNet spoke with two brokerage professionals — Evan Lyons, a Michigan-based senior director of investment sales with Encore Real Estate Investment Services, and Harrison Klein, an associate with Marcus & Millichap focused on the Boston region — to develop a list of best practices for bidders participating in online CRE auctions. Both Lyons and Klein have been involved in numerous successful auctions, representing both purchasers and sellers.

Based on conversations with Lyons and Klein, LoopNet developed the following list of best practices for bidders participating in online CRE auctions:

• Show up on auction day(s).
• Understand how pricing works.
• Conduct due diligence (and don’t be afraid to request more info).
• Tour the property (even virtually).
• Have a post-acquisition strategy.
• Be prepared to move quickly (and pay cash).
• Have fun!

Lyons says that it’s often the most fundamental step, just showing up once the auction begins, that eludes many potential bidders. He said that, “It’s easy to look at a deal, find some things wrong with it relative to where you think the property’s going to trade and then move on.” But he noted that, oftentimes, after an auction ends and prospective purchasers find out what the final price was, they realize that they missed an opportunity. “If this property checks the boxes for most but not all of your needs, I think it’s worthwhile to have that browser up on auction day[s] and have the ability to click that button [to bid] if it’s going in a direction that better suits [your] needs,” he said.

Klein noted that one of the common mistakes he sees novice bidders make is misinterpreting the relationship between the opening bid price and the final price. He said that bidders sometimes assume that if a property has an opening bid of $500,000, for example, that it will sell for approximately $700,000. In reality, though, the opening bid usually represents just a small fraction — Klein estimated approximately 30%, on average — of what the property will ultimately trade for, and a serious bidder should be mentally (and financially) prepared for that outcome.

As with any real estate asset acquisition, conducting your due diligence is critical. Fortunately, online CRE auction platforms usually simplify this process, which can sometimes be fragmented and arduous in a traditional investment sale scenario. “One of the beautiful things about an auction platform is that all of the due diligence needed, generally, to properly assess an asset is provided in a digital war room well before auction day. By getting registered and showing that you’re a ready, able and willing buyer, an investor will have access to all of the third party [reports] necessary … that they’ll need to review and get comfortable with the asset,” Lyons said.

While the majority of the relevant materials will be readily available, Lyons also advised that bidders should not hesitate to request any additional information they may deem necessary — even on the day of the auction. “Up until the final 20 seconds [of the auction], I’m on one phone call with the seller and Ten-X facilitator … and I’m on my other phone … making calls and receiving calls from investors who are actively bidding down to the last second and are tapping me for information.”

Lyons noted that one facet of the due diligence process that bidders sometimes overlook in the virtual realm is physically touring the property and the surrounding area. If it’s not feasible for you to visit the property in person, Lyons suggested some alternatives: “You can … hire someone to fly a drone to visit the property, or just to take some photos of the property … have a family member, or a friend or a local representative go and visit the property. Call the economic developer locally to ask about that area. Do some diligence to get comfortable with the area so that there aren’t surprises pertaining specifically to location.”

Klein advised that, just as with any real estate asset acquisition, it’s important for bidders to have a developed strategy for the property, should they become the buyer. Klein said bidders should consider why the property is being auctioned, as it’s often (though not always) a sign that there are some issues that a new owner will need to contend with. Does it need a new roof? Are multiple leases expiring? The bidder should understand what those challenges might be and have a plan for resolving them. He added that it’s also important to have sufficient cash reserves, in case any unforeseen problems arise following the purchase.

Klein advised that bidders/buyers need to be prepared for the rapid nature of online CRE auctions, particularly compared to traditional investment sales. “They’ve got to be prepared to move quickly; they’ve got to understand this is something they’re going to have to close on right away,” Klein said. Typically, the successful bidder has only 30 days to close on the transaction, and they are fully committed once the auction ends. Thus, they need to ensure that they have completed all of their due diligence in advance of the auction, and they need to be ready and able to close on the property with some rapidity.

In addition, Klein said that bidders should be prepared to acquire the property with cash; while some auction platforms do offer limited financing options, the interest rates are generally not as favorable as traditional financing and the terms are usually shorter.

Lyons summed up the final best practice for bidders rather succinctly: “Have fun with it, because it’s an exciting day.” Echoing Wayne Gretzky’s famous adage about hockey, he also reiterated that merely showing up is the most important step that any bidder can take. “Show up and bid, show up and click the button, because you’re going to miss out on every property that you don’t show up and register for.”