If you’ve never tried it or even thought about it, there’s a lot to be said for the auction process as a method of selling or buying distressed assets.
And we recently had three experts on the air to give us the scoop.
Joe Cuomo, SVP and co-head of business development at Auction.com, said the REO market is a melting ice cube, and his company has been a major beneficiary. Auction.com has sold $2.5 billion in real estate so far this year – lots of it for special servicers and banks.
The assets are quality, he said, and over the next two years he expects a wave of maturity defaults to push more property onto the market.
Barry Swatsenbarg, the national director of investment and loan sale advisory services for Friedman Integrated Real Estate Solutions in Michigan, said he has done $350 million to $450 million in sales during his 2.5 years working with Auction.com.
“The beauty of the auction process is, with the transparency, there are benefits to both sellers and buyers,” he said.
While buyers may have a smaller due diligence window, they can see their bids in real time, he said. If they win, they know by how much, so they don’t feel like they grossly overpaid for an asset.
And sellers have certainty of execution, Swatsenbarg said.
Charles P. Toppino, founder and president of Oak Pass Capital Management in Los Angeles, said the auction process gives efficiency to buyers by allowing them to start bidding at lower levels. The key, he said, is to know your limits.
“If you’re a disciplined buyer, you do your homework, you set your cap, and you live with it,” he said.
Of course, when you’re bidding, it’s only natural to wonder who’s bidding against you. Is it man – or machine? Cuomo said you can be confident in real market action once you get past the reserve amount. And unlike the traditional sales format, you know that you always have the opportunity to be the last click on the screen.
So, why would an experienced, traditional buyer like Toppino show interest in the auction process? Because he’s less likely to compete against institutional players with established financing.
“It’s very difficult to get a one-off asset financed by a bank,” he said. “If I can figure out how to pay a good price for an asset, I’m going to have a pretty good chance of being the best buyer on it.”
Swatsenbarg said Auction.com’s platform integrates easily into his firm’s sales process – which often involves transactions on defaulted CMBS.
“We had – in a couple of deals – closed bids that were 25 to 30 clicks past the reserve. The bidders were smaller investors. The deals were in the $5 million range, and they just wanted to have the property.”
Due diligence by buyers can be a problem, said Toppino, especially as special servicers may not have or want to provide the information.
“(But) As the asset quality goes up and the asset sizes go up, I think the market is going to demand higher-quality due diligence,” he said.
Added Cuomo: “We’re only as good as the quality of due diligence that’s provided by the sellers – and we let everybody know that upfront.”
So, what’s the bottom line on commercial real estate auctions? I think people get a risk-adjusted return on their investment. As a seller, the more transparency you can provide to a deal, the better pricing you’ll get. That’s where a good local broker comes in – someone who can round up the details and make the process as smooth as possible.
Cuomo said he thinks the auction process is only going to gain more credibility as the commercial real estate markets continue to thaw.
“The shift is on. It’s the transformation of real estate. It’s an offline to online game,” he said.
“All were trying to do is bring buyers and sellers together, just like eBay and Amazon. I think we’re here to stay. We’re working a lot more natural holders of real estate. We have deals coming in from the GGPs and the Blackstones and those types of folks. Even when the ice cube does melt, you’re going to see Auction.com around for a long time to come.”
Click here to listen to the entire interview on commercial real estate auctions.
