Last summer, real estate owner Roger Kellogg needed to sell several office buildings quickly. The Florida-based investor had located a replacement property to buy as part of a potential tax-deferred 1031 Exchange deal, and was anxious to unload four fully occupied Florida office buildings within the 180-day exchange period mandated by federal law. But instead of taking the traditional route of listing the properties with a broker, Kellogg chose an “open-outcry” auction, replete with auctioneer and gavel, to sell the office buildings last August.

Three separate buyers paid a total of $15 million for the 225,000 sq. ft. complex. Far from a fire sale, the final price was $2 million higher than the “strike price,” or the goal Kellogg had set. Ultimately, Kellogg decided against entering into a 1031 Exchange transaction due to recent reductions in the capital-gains rate, but he thoroughly enjoyed the auction experience.

“I'm a fan of auctions,” declares Kellogg. “The pricing is very competitive.” The investor has used the auction method on two separate occasions. With the traditional brokerage methods of marketing a property, Kellogg says, “you only get a market price.”

While many brokers disagree that auctions are the best route to achieving a high sales price, they continue to grow in popularity among commercial real estate investors. In 1980, $10 billion of real property, mostly farmland, was sold on the auction block, according to The Gwent Group, a real estate consulting firm based in Bloomington, Ind. By 2001, auction sales had ballooned to $54.5 billion and rose to $58.5 billion in 2002. (The study does not break out separate figures for commercial, residential or agricultural uses.)

Moving Beyond Oddball Properties

Typically, auctions help identify the market for property that is hard to value, even oddball, but not distressed, according to Steven Good, chairman of Chicago-based Sheldon Good, which conducted the Florida auction. In the past 30 years, Good claims to have auctioned off 40,000 individual properties from 70 different classes of commercial real estate. Seventy? He delightedly ticks off a list that includes private islands, golf courses, mineral rights, hunting rights, closed military bases, an abandoned jail and a gold mine. About 65% of the firm's sales are commercial properties.

Auctions have the ability to “flush out” potential buyers for properties that, at first glance, seem unusable, according to Larry Theurer, president of Theurer Auction/Realty in Wellington, Kan., which specializes in land and commercial properties. “Sellers forget that there are other people who may have a different idea about what a property may be used for,” he says.

But some sellers prefer auctions for even conventional properties. Kellogg, for one, says he turned to auctions after growing dissatisfied with conventional broker listings. The Florida investor is distrustful of brokers, who he believes try to steer sales to their preferred customers and are not able to reach the widest-possible universe of buyers. First-time investors, for example, do not appear on the customer lists maintained by brokers, Kellogg says. “I think it's a terrible system.”

Naturally, brokers have a different point of view. Richard Plummer, senior vice president in the downtown Los Angeles office of Cushman & Wakefield, does not believe that auctions are the best way to maximize the sales price. Real estate remains a local business, Plummer says, and many auction firms operate on a national level, parachuting into town only when a sales event is imminent. “Local brokers are more knowledgeable,” he says. “We know the city on a 24-hour basis.”

Plummer also claims that the auction process does not give prospective buyers the opportunity to go through an exhaustive due-diligence process. He points out that in a conventional brokered sale, a buyer with an accepted offer has two or three months to analyze the due-diligence materials.

If the buyer discovers problems — which is typically the case — buyer and seller have the time to work out the problem without endangering the sale. In the case of a minor environmental problem, the seller's broker has time to research the problem, and then return to the buyer with an acceptable solution. “We can get the buyers comfortable that it is a $10,000 problem, not a $1 million problem,” Plummer says.

Short of that level of due diligence, he says, buyers are not willing to pay top dollar for properties, because the buildings still have outstanding issues.

Auctioneers interviewed for this story dispute these assertions, however. Typically, real estate auctioneers prepare due-diligence packages well ahead of the sale, and prospective buyers have a certain period before the sale, sometimes a month or more, to examine the property on their own. In the event that a buyer finds an undisclosed condition, “we can negotiate that beforehand,” says auctioneer Theurer. Auctioneers report that few, if any, sales have fallen through due to undisclosed conditions or for any other reason.

Plummer also asserts that experienced brokers have the ability to achieve a higher sale price than an auction. An experienced broker, he says, “is proactive in going after the most likely buyers, not just every Tom, Dick and Harry.” The strategy, he adds, is to “build momentum through the competitive bidding process.”

After soliciting preliminary offers from a group of buyers, the broker can select three or four of the highest bids, and then send due-diligence packages to each of them, according to Plummer. With the small group of final bidders in place, the broker can conduct a second round of bids.

Unlike an auction, these bids are made privately, not publicly, and bidders do not know which part has made the highest bid. “After two or three rounds,” Plummer says, “we believe we can build a very competitive bidding process.”

Plummer's conclusion: “Auctions are good for liquidating properties that are not complicated.” For major assets with complex issues,” he says, “it doesn't work.”

Inside the Auction Process

Beyond the open-outcry format, auctions can take many different forms. The sealed-bid process enables the seller simply to take the highest bid, which is not disclosed. In other cases, the auction converts the sealed-bid process into an open-outcry sale, by taking the highest bid, and establishing that as the minimum for a whole new bidding contest.

In still yet another format, the auctioneer may take informal bids, and disclose the highest one, designating it the “stalking horse” that other bidders might try to outdo.

In advance of the sale, the seller and auctioneer prepare a due-diligence package that includes environmental testing results, verification of title insurance, rent roll details and other basic information. Bidders have the opportunity to tour the property and double-check the information contained in the sales packages.

While some industry professionals argue than an auction puts the seller at the mercy of bidders, one auctioneer contends the process actually gives the seller greater control by setting a minimum price. “The terms of the offer are set by the seller, not by the buyer, so everyone is on a level playing field and it will bring market value for the offering,” says Louis Fisher, national auctioneer with Pompano Beach, Fla.-based Sperry Van Ness/Fisher Auction Co.

Another advantage of the auction process, according to Kellogg, is that buyers aren't entirely dependent on brokers for information about the offers of competing buyers. In effect, it's a more transparent process. “A lot of times, when you are making an offer on a property (using the traditional selling methods), you don't know whether there is another buyer, or if you are just bidding against yourself,” he explains. In an auction, buyers “can see who they are bidding against. There is no ‘hide-the-egg.’”

Forces Driving the Industry

Speed is arguably the strongest selling point for auctions. Typically, scheduled sales take six to 10 weeks from the start of marketing to the closing gavel. In November, a partnership known as Levitz Plaza LLC sold a pair of office buildings, Levitz Plaza I and II, to Constantino Noval Trust of Sylmar, Calif., in only four weeks. The buyer paid $14.2 million for the 144,350 sq. ft. complex, which was brokered by Sperry Van Ness of Orange County, Calif. and Interstate Auction Co.

That sort of speed may be crucial not only to investors like Kellogg who are trying to complete a 1031 exchange in a timely manner, but also to multi-national corporations who need to clear surplus real estate off their books by a certain date — either for end-of-the-year tax considerations, or to fend off a hostile merger.

In fact, the growth in corporate mergers and acquisitions is one of the main driving forces of the auction wave, according to the Gwent Group. In the event of a takeover threat, assets can be sold quickly to raise cash from equity in existing facilities. In other cases, real estate is sold off to help pay for the takeover. One recent corporate selloff involved a group of 12 properties scattered throughout the country that formerly belonged to Alcoa. The offerings ranged from a two-acre lot in Lafayette, Ind., to a 780,000 sq. ft. building on 122 acres in Lebanon, Pa.

Auctions also can be a great tool for marketing to international buyers, according to Frank Diliberto, senior vice president of Inland Real Estate Auctions Inc., a unit of Oak Brook, Ill‥-based Inland Real Estate. Late last year, Intel Corp. hired Inland Real Estate to market and auction a 430,000 sq. ft. manufacturing plant on 68 acres in Las Piedras, Puerto Rico. Diliberto claims the sale marked the first time a U.S.-based auction house had sold a property outside the U.S. “The auction was used to reach a global marketplace very quickly and provide assurance as to the date that Intel could complete a sale,” says Diliberto. The auction attracted companies from Asia as well as the U.S. The buyer was Lightstone Group of New Jersey.

Inland Real Estate Auctions estimates that 60% of its business stems from commercial real estate transactions. Auctions are able to focus on a single property at a single moment, which explains their popularity among buyers and sellers, says Diliberto. In the case of the Intel auction, the sale “attracted the attention of the global real estate market.”

To Diliberto, that widespread interest is a sign of maturation for the auction industry. “Auctions have historically prevailed in difficult markets,” he says. “It has also provided very good results in some very positive markets, and that's what we are seeing today.”

Morris Newman is a Los Angeles-based writer.