Do you remember when advertising a "bankruptcy sale" attracted legions of deal-hungry bidders? Not anymore: The game has changed. Real estate disposition now requires new techniques to drive values and timely sales.
Challenges
Bankruptcy sale contracts are presented and executed on an as-is, where-is and contingency-free basis. It is common, however, for bidders to rely on some financing. Unfortunately a lender's underwriting standards, even a lender's very existence, can change overnight. As a result, more successful bidders will be seeking extensions and, occasionally, re-trades in order to close. The reduced availability of capital is not only reducing the pool of investors; it is impacting the size of the transactions that many investors are able to digest.
Few exceptions aside, attendance at real estate auctions is down. Worse still, there are even fewer buyers vying for a property marketed through the traditional listing and negotiated sale process. The constant stream of media impresses on the buying public that "we have not reached the bottom," and the result is that few buyers are eager to make substantial real estate investments in assets with uncertain value. Buyers and bidders must now be incentivized to buy; they need to believe they are getting the deal of a lifetime.
Winning Strategies
"Time is money." As cliché as that phrase is, it is most relevant in a declining market. Until markets have clearly stopped sliding and have begun to appreciate, nearly every bankruptcy case with significant real estate assets will benefit from an expedited sale.
In the recent case of Quick Service Foods- Tampa Inc., No. 08-02797 (Bankr. M.D. Fla.), the debtor,(Church's Chicken) had assets that were franchise assignments as well as freehold and leasehold real estate interests in 17 locations. A "multi-par" marketing and bid solicitation strategy was developed through which it accepted bids on individual locations as well as the entirety. The campaign produced a variety of bidders, six of which successfully bid on a mix of locations resulting in a total liquidation. A campaign that simply offered the entirety likely would have left a significant amount of money on the table.
A similarly structured bid process was applied to a collection of Cambridge, Mass., properties (07-16591 Husam M. Azzam; Case type: bk chapter: 11). In this case, a series of contiguous lots improved by multifamily properties of varying size comprised the estate. Each deed was offered individually or in combinations chosen by the bidders. After successive rounds of piecemeal bids, the entirety was offered using the sum of the previous high bids as the minimum opening bid. Bids on the entirety exceeded the collection of individual bids by more than 25 percent; notably, offering the properties individually, in combinations and in the entirety stimulated bidding and produced a very healthy attendance. Further, the campaign offered a series of inspection opportunities and a preponderance of property data-two components that are critical in building bidder confidence but conspicuously absent in many bankruptcy auctions.
An absolute auction offers the market the maximum incentive to bid. Absolute auctions cast the widest net and virtually guarantee the broadest possible interest in a sale. Arguably any real estate assets disposed of in a §363 sale, where the debtor is the seller, should be offered as absolute. If creditors are offered the right to credit-bid and protect their interests, then they do so at the risk of taking ownership of the asset. In cases with complicated debt structures, each creditor is on the same proportionate footing. All concerned parties benefit from an expedited resolution to the extent that the property's market value is achieved.
Certain properties will benefit from an accelerated online sale. In a recent chapter 7 sale in Florida, a collection of lots were to be disposed of in an unremarkable subdivision. These lots had been marketed via traditional methods over an extended period and through a traditional marketing program. The few sales that closed did so for $400-500 apiece. A systematic online liquidation of the properties was implemented in order to accelerate the process, and at the same time reach the broadest possible audience. One lot sold for $8,000, 20 times the value of the previous lot sales. To further extol the benefits of technology, it is worth noting that this sale closed and funded inside of six hours using simple electronic signature software.
Real estate sales, and indeed values, will continue to face significant challenges in the coming months or even years. Looking beyond the status quo toward these innovations and venturing into new techniques and modes of operation designed to meet them will produce superior results.