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NGExpert financial copywriter
Page written by Chris Godfrey. Last reviewed on August 23, 2024. Next review due October 1, 2025.
Going, going, gone! Commercial real estate auctions can be fast and furious, but they may give you a bigger range of properties to choose from and eliminate the usual lengthy buying process. You may even find a diamond in the rough and bag yourself a bargain.
Commercial property owners may choose to sell at auction for a number of reasons:
Additionally, commercial real estate may come up for auction because of financial distress:
Most commercial real estate auctions function similar to residential property auctions: The real estate is offered by an auction house to bidders who meet online or in person. From a base starting price set by the auctioneer, buyers must submit incremental bids until the highest price is achieved and the final bidder ‘wins’ the auction. Each sale is usually over in just a few minutes.
Prior to the auction, the property will have been advertised on the auctioneer’s website and other channels and potential bidders will be able to view the property ahead of sale day. The auctioneer will also have advised potential bidders of the property by email, postal mail and telephone to increase awareness of the real estate. A ‘guide price’ will be set by the auction house to give potential buyers an indication of the likely selling price. The seller also has the option to set a ‘reserve’. This is the minimum sale price the property owner is willing to accept. If the sale fails to reach the reserve on auction day, the owner has the choice of lifting the reserve to take a lower price or letting the property stay unsold as a ‘no sale’ item.
Commercial real estate may be purchased by a wide range of buyers, including:
A deep pool of buyers is always better for the seller than the buyer, as more parties bidding can drive up the final price.
Yes. Some auction houses may specialize in certain types of commercial real estate, but generally, all types of business property can be purchased at auction.
Although all commercial real estate auctions work by selling property to bidders, different types of property auction have nuances that impact the way they operate:
Also known as a ‘no reserve auction’ – in an absolute auction, the highest bidder wins, regardless of the amount of the bid. In theory, you could bid $1 and win a piece of real estate, although that scenario is unlikely. These types of auction will attract more bidders as there is no minimum price or reserve to get past, but they present greater risk to the seller. These types of auction are usually conducted by lenders and government agencies selling financially distressed properties. In an absolute auction, all sales are final, meaning there is no room for the seller to back out if the hammer price is very low.
In this type of auction, there is a minimum bid amount on a property. The minimum bid is announced before opening the sale to potential buyers. The minimum bid is often the balance owed on the mortgage in the case of foreclosure, or taxes owed in the case of a tax lien. All sales at the minimum bid or higher are final.
In a reserve auction, the seller sets a base price they will accept. Bids are treated more like offers that the seller can accept or reject. Unlike a minimum bid action, the reserve price is kept secret as the seller doesn’t share the information in the hope they’ll get a higher sale price. If the real estate fails to get a bid at or higher than the reserve price, the seller can remove the property from sale.
As well as different types of auction, there are also different ways for buyers to bid:
In an open auction, bidders can see the amount of any other bids that have been made. Buyers prefer open bids, because they can see what the competition is doing and can raise their bid as needed. If there is no competition, a low bid might win. Conversely, if two or more buyers want the property no matter what, it can result in a ‘bidding war’ that drives the final sale price to unexpected highs.
Blind bids are generally preferred by sellers, even if this method can reduce bidder competition. The blind bid process is more like bidding on a project. Buyers must make a bid without knowing how others are bidding. Motivated buyers need to make a bold bid upfront instead of taking a wait-and-see approach. In a blind bid auction it is easier for buyers to pay more than they wanted or miss out on the real estate because they lowballed their offer.
Buying commercial real estate at auction is different from traditional ways of buying property – commercial or residential:
First off, determine what kind of commercial property you want or need and set a maximum price you’re willing to pay. If you’re buying property for your business to operate from, there’ll be specific requirements to meet. If you’re buying commercial property as an investment, do your homework and thoroughly research the various types of commercial property and their potential returns on investment. (Keep in mind that with commercial real estate, the annual internal rate of return (IRR) is the most important factor. This is income from operations (rent) and appreciation combined. Commercial properties almost always earn more from appreciation (their rising value) than they do from operations. The higher your IRR, the better.
Unlike traditional property purchases, buying commercial real estate at auction is a much faster process and you may need to have the cash to meet the full purchase price as soon as the hammer falls and you’re the winning bidder. At the very least, you’ll need a cash deposit of 10% to 20% to hand. If you don’t have a pool of ready cash, you’ll need to arrange temporary financing to cover the purchase price prior to the auction. Once you own the property you can swap this type of bridge loan for a regular commercial mortgage. (Check out temporary auction financing here).
With your goals set and financing arranged, you can search auctioneer websites for potential properties to buy. If possible, it is always worth visiting any property before the sale. At the very least, be sure you ask the auctioneer for all the relevant information, including details of any outstanding taxes or liens. Advance knowledge of any issues is essential as property auctions leave minimal room for argument. Most commercial real estate is sold ‘as is’. If you don’t ask in advance and you find major problems after the sale, the burden will fall on you.
If you’re attending the auction in person, be sure to arrive well in advance of the sale time of your target property. Commercial real estate auctions move fast. You’ll need to register with the auctioneer as a bidder and to get a ‘bid number’ that acts as your identifier. You may also have to provide proof of funds to register. This prevents people bidding who do not have the cash to buy the real estate.
Once the auctioneer starts the sale, you’ll be able to offer your bid. It may work in your favor to go slowly, letting the sale price close slowly and giving you space to see who the competition is. This means placing incremental bids instead of charging in with your best offer. Always set a maximum you are willing to pay and try not to get carried away in the frenzy of the auction and pay more than the property is worth or you can afford.
After you’ve placed the highest bid at auction there are basic steps to take:
After you place the winning bid, you must provide your contact information, how you want the property to vest (for example as an individual, a partnership, an LLC or a trust) and pay up. You’ll get a copy of the document indicating that you bought the property.
You’ll usually need to pay a cash deposit after the auction and then pay the balance of the purchase price within 20 days. However, for some real estate auctions – especially foreclosures tax lien sales – you may have to pay the full amount on the spot in cash or with a cashier’s check (or multiple checks). Any amount you tender over the winning bid amount will be returned in a refund check along with the deed approximately 10 days following the sale.
The Trustee’s Deed of Sale confers the title of the property to you. There are no warranties, explicit or implied and you receive the property with all encumbrances, such as outstanding property taxes or other liens. The trustee should send you the deed within 15 days after receiving your payment in full.
Buying commercial real estate at auction has advantages and disadvantages:
Pros:
Cons:
Commercial real estate agents are usually well-versed in the property auction process, and they may be able to help you find a property to bid on as well as steer you through the auction process – or even bid on your behalf. However, if you utilize the services of a commercial real estate agent you’ll need to pay for their assistance.
Because lenders need to appraise a commercial property before providing mortgage financing, you won’t be able to use a commercial mortgage to buy your chosen real estate at auction. Instead, you’ll need to arrange a bridge loan or other type of business loan as an interim financial solution. Once you’ve purchased the property using this temporary financing you can obtain a commercial mortgage to pay off the interim funding and buy the property over the long term.
Commercial mortgages are business loans that you could obtain by approaching banks, credit unions and online lenders one by one, or you could use the services of a loan marketplace that will immediately introduce you to a choice of real estate loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out a commercial mortgage before.
For a commercial mortgage or any type of business loan, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality commercial mortgages, bridging loans and business loans from a choice of lenders. Buy with confidence at auction. Register with Swoop today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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