At first glance, it might appear that real estate brokers and auction companies are foes rather than friends, competitors rather than allies. But if you dig a little deeper, you’ll see that brokers benefit significantly from selling properties via auction.
“With only a few exceptions, I would choose an auction over a traditional sale process,” says Fariba Kavian, a senior vice president with NAI Capital Inc. in Los Angeles. “Until you have sold a property by auction, you just don’t know how great the process is. Brokers have a fear of being rendered irrelevant. But that’s not the case at all.”
Kavian has sold several properties through auctions, and she says there are many benefits to selling through this channel. However, she fully admits she was skeptical and suspicious at first.
“As a broker, my priority is to obtain the highest possible price for my clients’ property, and I had a misperception that selling via auction would be like a fire sale,” she said, adding that the first property she sold using an auction actually ended up selling for 32% more than she originally expected.
Kavian isn’t the only broker with initial misperceptions of auctions. Other brokers are concerned that auctions will cut into their overall commissions. Or they’re worried that the auction company will steal their clients.
“Those are valid concerns,” says Eric Paulsen, executive vice president and general manager of the commercial real estate division of Auction.com, the leading online real estate marketplace. “But we see brokers as a necessary and valued part of the auction process, and we are vocal with sellers about their need to continue to use brokers and to maintain brokerage commissions.”
Supporting the broker
One of the things Kavian likes best about selling property on Auction.com is the marketing support the company provides to brokers.
“Auction.com has its own database of potential buyers, and together, you’re multiplying the exposure for the property,” Kavian says. “Through their marketing process, Auction.com also reaches buyers globally that I may not otherwise have known about or found.”
Paulsen says Auction.com spends hundreds of thousands of dollars to market each auction. “We really have a turbo-charged marketing platform,” he says, “and those potential buyers are funneled directly to the broker. The broker’s name is on all of our marketing materials in the lead position, providing the broker additional branding opportunities. Our marketing process also benefits smaller brokerage firms who may not have the visibility or market presence of more well-known brokerages, nor the massive marketing budget that we bring to the table.”
The benefits of selling via auction are particularly obvious during the bidder qualification period. “You have to wear a lot of different hats in a traditional sales model, and some of those hats are back-office oriented, and take time away from more revenue-generating opportunities” Kavian says.
Auction.com qualifies bidders, both in terms of their level of interest and their financial capabilities. This reduces the risk for brokers of a deal not closing and allows them to spend more time selling the real estate or in generating new business. In a traditional sales process, brokers end up vetting potential buyers themselves, putting their reputations on the line every time they make a recommendation.
“We have a team that follows up with potential bidders who express interest in a property,” Paulsen says. “We see an average of 3,500 web hits per asset, and we can pre-screen potential bidders on the brokers’ behalf. If they don’t have time or the ability to contact every single person, we do it for them. That way, the broker can spend his or her time—as the local market expert—talking about the property to legitimate bidders and answering questions.”
Certainty of close
In a traditional marketing process, it’s not unusual for deals to fall out of contract multiple times before the property sells. “When I was a broker, we used to joke that every deal had to die three times before it closed,” Paulsen says.
The majority of that risk is mitigated with an auction. There’s no guessing whether or not a buyer is committed to closing the deal. Their bidding is proof enough, because before bidders are even allowed to click the mouse, they must place a deposit that becomes non-refundable if they win, and must demonstrate that they have the funds to buy the asset.
According to Paulsen, once there is a winning bidder on an asset, Auction.com closes 90 percent of the time, and once the bidder has signed the PSA and put up their earnest money deposit, that success rate climbs to 98 percent.
Auction.com also shepherds the winning bidder through the purchase and sale agreement, something the broker would have to do in a traditional sales process. “Once the auction is complete, Auction.com takes over and handles the escrow,” Kavian explains. “You don’t have to hound the buyer for anything. It’s fabulous.”
At the end of the day, brokers have a happy seller and a happy buyer. And they also have an opportunity to solicit new business.
“Most of the bidders that show up to auction do not have a brokerage relationship,” Paulsen noted. “The auction exposes the buyer to the broker and gives the broker a chance to sign up a new client. A lot of brokers see auctions as supercharged networking.”
For all of these reasons, auctions are fast becoming a viable channel for selling non-distressed commercial real estate: more than $3.8 billion in commercial property was sold on Auction.com in 2013, with over one-third of the assets brought to auction considered non-distressed.