7 Tips for Buying Commercial Real Estate at Auction
We saw a large rise in the number of auctions that occurred because of the amount of foreclosures on the market during the past few years. Foreclosures and bankruptcy are always going to be part of the Commercial Real Estate market. Buying properties at auction can be a great way to get incredible returns on your investment. We have been very successful in representing buyers in the purchasing of these assets through auctions. Below are some tips to help guide you through the process.
- Have the cash ready. In most of the auctions you are required to close within a short time period (~30 days) of the auction closing. That means it is virtually impossible to get conventional financing for the property. Have a credit line available or a bank ready to loan on your credit when it closes. Most of the purchase agreements in auctions do not allow for financing contingencies so if you can’t get the cash to close, you put your earnest money at jeopardy and could be liable for damages.
- Go to the property tours. This is pretty self-explanatory but this could be the only time you have to get into the property. A lot of auctions only have certain dates available to tour the property. If available, also walk into the stores and talk to the tenants (if occupied) about their unit and any issues with them. Make sure you understand any potential improvements or major repairs needed.
- Ask about the format of the auction. There are many different types of auction formats. Make sure you know the types of auctions and the definitions such as; Reserve vs. Absolute Auction, Online vs. Sealed Bid, etc. There are many different types depending on the auction company hosting the auction.
- Going Once, Twice, Ssssoold I mean start over. Auction.com is notorious for this. We have been successful at winning many auctions for our clients on this site. The frustrating part is that even if you think the auction is going to end it can get extended at the last second with a higher bid and reset the clock. If you think you’re going to be clever and win the property with a last second bid, you’re in for a disappointing surprise. As I am writing this article, I just completed working with a client on an auction on their site. The auction was supposed to end at 1:30 and finally ended just before 2:30. Now the highest bidder(s) will probably get a call to increase their bid.
- Beware of insider bidding. Auction.com has insiders bidding up the property on most auctions they hold. If you think you are going to win it and see the bid go over, don’t worry and be patient. Sometimes those bids are being artificially inflated to drive the price up. Even after it ends and you think you won, don’t be surprised to get a call from them saying you have to pay $X more to win it. Stick to your guns if you need to because a LOT of times they are bluffing and trying to get more money for the client. If they say it is yours if you pay that amount ask them if they are rejecting your highest bid. Hold their feet to the fire as I am sure they do not want to lose a deal. They have been accused and sued many times for “Shill bidding” on behalf of the seller.
- Hire the right experts to represent you. This doesn’t just mean hiring a broker but you may also need to hire a real estate attorney, environmental firm, roofers, and inspectors. With most of the auctions, you are required to do all your due diligence up front. Make sure your team has gone over all the material provided up front and is comfortable with all the aspects of the building before purchasing.
- Ditch the emotions at the door. Recognize when you have reached your limit. If you set a limit don’t get competitive and try to win the auction just to win. Auctions can be exciting and there is a good possibility to make very strong returns on your investment but you have to know your limits and stick to them in the end.