Are you thinking of buying a commercial income property at live or online auctions, but you’re unsure whether or not it’s safe?
There are numerous myths about auctions, but these days, they are a popular choice for some CRE investors. Below are some common myths about auctions with tips on how to maximize your success at a commercial real estate auction.
Myth #1: It’s A Second-Rate Property
While many properties auctioned off during the real estate crisis were in disrepair, current commercial property buyers are choosing auctions as an easy way to get a good price as quickly as possible. The vast majority of these properties are in excellent condition, with some of them even boasting tenants.
Myth #2: Auctions Are Sight-Unseen
While this may be true for auctions involving residential properties, it is generally not the case for commercial properties. Commercial property owners have a vested interest in attracting buyers to their property and know that CRE investors will not even consider purchasing a property without doing due diligence first.
Owners give all the information needed for potential buyers to investigate the property, with property tours given on specific dates.
Myth #3: Expect To Get Hit With Hidden Costs
Auctions are almost always free, and you should never have to pay in order to join one. At the same time, while you’ll have to prove you have the financial capability to pay for the property, there shouldn’t be any unexpected costs.
However, smart investors should always go into a deal with an experienced team of professionals, who will check for proof of ownership, liens on the property, zoning issues, and other potential roadblocks.
Myth #4: You’re Making A Profit Off From Someone Else’s Misfortune
Most commercial property owners aren’t mom and pop stores, so it’s highly unlikely you’re taking over a business that’s been in the family for generations. Even if the property is in foreclosure, it may be a specific exit strategy chosen by the owner.
While there are legitimate reasons to purchase properties at an auction, there are a few things to be wary of.
Not All Auctions Are Equal
While most live auctions are above-board, some online auctions can tend towards the shady side. For example, some investors have complained that the owner of the property never planned on actually selling the property: they merely wanted to see for how much it would sell.
Others report instances of sellers backing out at the last minute, even though a buyer has already won the bidding. Since the seller has a clause in the contract that lets them back out at any time for any reason, this leaves the buyer with nothing to show for the time and effort invested. Additionally, some investors have complained that, with some online auctions, they are notified that they have won the bid, and then at the last moment, a higher bid comes in that resets the clock (and starts the bidding all over again).
Tips For A Successful Auction
Determine the FORMAT of the auction
There are several different types of auctions, so be sure you know what type before you enter your bid. Here are the definitions of some of the most common:
- Absolute Auction (no-reserve auction) – In an absolute auction, the property is sold to the highest bidder. There is no minimum bid.
- Reserve Auction – In this auction, there is a minimum required bid, however, the amount of the minimum bid may be unpublished. Although bidding occurs as in a regular absolute auction, the seller is not required to take the highest bid. This could occur in an instance where the highest bid is considered an unacceptable price by the seller.
- Published Reserve Auction – The seller decides on the lowest price they are willing to accept for the property. The bidding may start at any price; however, the seller reserves the right to reject, accept, or counter the highest bid if the reserve price is not reached.
- Online Bid – This type of auction is becoming more and more popular, especially since most sellers feel it attracts more buyers.
- Sealed Bid – In a sealed bid auction bids are submitted simultaneously to the auctioneer. None of the participants are privy to the amount of the other bids, however, the property still goes to the highest bidder.
Make sure the money is ready
Auctions require you to prove you can pay cash upfront.
This is because most auctions close within 30 days, with the entire sum due at the close of the auction. Since 30 days isn’t enough time to get bank financing, you’ll need to make sure you already have the money set aside – whether you’re paying for the purchase out of your own funds or are relying on private lenders.
If for some reason you can’t get all the money you need to close the deal, you’ll not only end up losing your earnest money, but you might also be held liable for damages.
Last but not least, don’t let your emotions take over. It’s tempting to want to win, just for the sake of winning, but if once you reach your limit, bow out, and resolve to try for another one instead.
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