Selling Distressed Real Estate at Auction in Today's Market
With billions upon billions of dollars secured by all types of real estate already in default and the anticipation of more to follow, where does a bankruptcy practitioner turn to immediately create the most interest and maximum value for the estate? The use of auction marketing has proven itself in the sale of real property for centuries. In the present market, however, where inflexible lending criteria is prevalent and there is an extraordinary dollar volume for assets in default, one cannot simply set a date and offer any real asset to the highest bidder who shows up with a deposit check in hand. Instead, one must apply the type of auction that properly relates to the situation surrounding the distressed asset.
In other words, in order to have a successful sale, one must first find out what is it about the asset that is distressed. Is it the property, the debtor, the market influences or a combination of these factors?
Market Influence
Let us consider a debtor who purchased a Class A office building in a prime metropolitan location that was fully leased when the debtor purchased at the peak of the market with short-term financing. The debtor has now seen occupancy plunge with a major tenant vacating due to its own financial woes. In current market conditions the debtor is unable to refinance due to more restrictive lending practices, as well as having little to no chance of leasing the vacant space at a price that will justify the debtor's loan payments. In this case it is the market influence that is distressed, not the property. There should still be very strong demand from investors for a well-located, high-quality property, and the adjusted price will be driven by current rental rates, cap rates and financing terms.
The Property
In other cases, the actual property can be the issue at hand. For instance, a debtor holds a portfolio of old manufacturing plants leased to suppliers of the auto industry over long terms. These properties have been upgraded based on necessity throughout the years, but a major tenant has failed to renew its lease, seeking modern space at lower rates. The years remaining on other leases are numbered, and the future remains very uncertain for renewals. Investors considering purchasing these assets are looking at tired buildings in various types of locations with tenants who have vacated or will likely vacate within a few years. Under these circumstances, one can argue that the properties are the distressed part of the equation. The sale will depend on finding immediate users or the price point at which investors will come in and participate.
The Debtor
Another debtor may have a portfolio of convenience stores (C-stores), all in great locations and all showing strong sales. However, the size of the portfolio has overcome the debtor due to mismanagement and is now forced into bankruptcy; it is the seller who is distressed. The properties have location and have shown sales performance, but have unfortunately come to this end because of the lack of attention from the debtor. There should be the highest demand for this type of situation and the prices will reflect that demand if the new buyers are forced to compete to pay fair prices for the assets.
In evaluating each of these situations, one must identify what is distressed in order to determine your potential universe of buyers and what will be influencing buyers' decisions. From this standpoint, one can determine the degree of success that may be attainable. The next step is to develop a strategy that will achieve that success, taking into consideration the point in time and selling terms.
These considerations include determining the type of auction sale to conduct. Should the property be sold absolute by a published minimum bid, or be sold subject to a confidential reserve? Should online bidding be allowed, a multi-parcel auction event be held, or the high bidder's choice method be used? Or should an auction be held that combines more than one of these methods? The property conditions, market influences and the debtor's situation will have a great impact on how buyers will respond to the offering. Therefore, one must use careful deliberation in packaging the auction for the expected buyer participation to yield the maximum number of potential buyers. When an asset itself is not distressed, that is to say, it is well-located, of good quality and in high demand, selling at an open out-cry auction has proven to be the most successful. In this instance, bidders are placed in close proximity to each other, where they must compete openly. Alternatively, if you have a distressed property or one of lesser demand, a sealed-bid auction may be the right choice where potential bidders need to compete without knowing who they are competing against-forcing them to put forth a fairly strong bid to eliminate the risk of losing the auction.
All of these situations are taken into account and used to develop a marketing plan that properly exposes the assets to the marketplace. In bankruptcy auctions, and in all auctions, it is never truly know how successful an auction-marketing plan will be until the gavel has fallen and the asset is sold. However, the objective is to eliminate as much of the guesswork as possible and think like potential buyers, package the auction for those buyers, and let the marketplace openly compete for the asset.
Scenarios
For new residential construction, unsold inventory can be sold in a day with an on-site live event simultaneously broadcast over the Internet. In just one day, sales can comprise of just a few units-vacant lots, single-family homes or condominiums-to as many as a 100 or more.
A portfolio of investment properties such as multifamily, office, retail or industrial, whether mixed or all one type, can be marketed to a larger universe of buyers all competing at the same time through an effectively marketed auction event. With multitude of properties, the buyers see their chance of winning increase because of the multiple of properties that are available. Depending on the property's geographical location, the event should be planned in a manner to increase participation. Consider the benefits of reviewing real estate with an auction professional for insight about the influences that determine value and marketability.