Buying and selling commercial real estate: The auction option

To bid or not to bid, is that the question?

With apologies to Shakespeare’s Prince Hamlet, to bid or not to bid is only the last of many important questions to be answered by those considering buying or selling commercial real estate through an auction. Real estate auctions are as old as, well, Shakespeare, and up until recently had been relegated to the realm of distressed properties and trophy homes. With the advent of online auctions, however, buying and selling commercial real estate by auction is becoming increasingly acceptable to buyers and sellers of all types of commercial real estate.

As with any new territory, the world of online auctioning of commercial real estate is in many ways uncharted. In some states auctioneers need not be licensed, although most real estate auctioneers comply with real estate brokerage laws. Stories of shill bidders and scoundrels will forever be a part of the auction legacy (and have not been totally eliminated; see, e.g., Rose v National Auction Group, Inc., 466 Mich 453; 646 NW2nd 455 (2002)). And, the development of case law governing the conduct, rights, and remedies of the various parties to an online auction of real estate is far from being established or consistent. All of this points to the need for participants to navigate the online auction with care and a strong understanding of the process. Most participants in a traditional commercial transaction understand that process well enough. Not so with the online auction; this requires a new kind of diligence – diligence in understanding the process.

There are many differences between the online auction and traditional transactions. Unlike a traditional commercial sale or purchase, with the online auction the seller who wants to attract a sufficient number of serious bidders should provide much of the diligence (e.g., surveys, environmental assessments, etc.). In a traditional transaction this is often done by the purchaser, at its expense. What the seller gains in the auction process is control. The seller may shorten the time between the list and close, which may reduce carrying costs and potential liabilities. The Seller dictates the terms of the purchase agreement and controls the closing date. This can be helpful for exit strategies and tax and estate planning. Sellers of multiple parcels or corporations performing asset clean-outs have also found the online auction to be a useful vehicle. Seller’s can select from a variety of types of auctions, the most common two being an absolute auction (highest bid wins and the sale must occur) or a reserve auction, where the property is not sold unless the high bid meets a certain threshold – with many variations of the two. It is critical that sellers understand the auction process and ask the right questions before entering into an auction contract, or they may regret having selected the auction option.

The need for diligence in understanding the process is equally great for the buyer. For example, while most of us would not likely take the time to read the terms and conditions section of an online retailer’s website, the terms and conditions of the online auction must be fully understood. And not everything that a buyer needs to know about the process can be found in the written terms and conditions. Here, there is no substitute for engaging real estate professionals with experience in this area who know the process. For example, even though the seller may be providing much of the traditional due diligence information, there is still traditional diligence for the buyer to do, and all of this must typically be done before the purchase agreement is signed (which, by the way, is non-negotiable – but, in fairness, the smart seller will provide a fair purchase agreement in order to attract bidders). Hopefully, it is becoming clear that there are many nuances in the online auction that do not exist in the traditional commercial real estate transaction.

To bid or not to bid is only one of many questions that must be asked in commercial real estate online auctions. A whole new area of diligence is required – diligence in understanding the process. With such understanding, buyers and sellers may participate in online auctions with the same measure of confidence they have in the traditional deal.