5 Myths of Real Estate Auctions

Posted on February 28, 2014

Although most real estate investors are familiar with auctions, they don’t understand them well enough to be able to distinguish between fact and fiction. Brought to you by Auction.com

Although most real estate investors are familiar with auctions, they don’t understand them well enough to be able to distinguish between fact and fiction. There are five pervasive myths regarding real estate auctions—myths that may be preventing investors from taking advantage of this efficient, transparent method of buying and selling.

Myth #1: Only distressed properties are sold via auction

The most pervasive myth regarding commercial property auctions involves the quality of the real estate. Many people mistakenly believe that only distressed properties are sold at auctions.

“Like many myths, this particular myth had some basis in truth,” admits Rick Sharga, executive vice president of Auction.com, the nation’s largest provider of online auctions for commercial real property. “But the operative word is had.”

Years ago, most property sold at auction was distressed, and auctions were a way for lenders to off-load problematic assets. That’s not the case today, Sharga says, although auctions are still popular with banks and other lenders.

“Commercial property auctions have evolved and now include assets of all types and quality,” he points out. “Auctions have always been used to sell art, jewelry, and other high-end items, and now they’re being used to sell class A commercial properties.”

In fact, many properties sold through Auction.com have generated a higher sales price than they would have in a traditional marketing process, Sharga notes. “Auction.com has auctioned properties across the spectrum,” he adds.

Myth #2: Buying at auction means buying “sight-unseen”

For most buyers, a necessary part of the sales process is the ability to “kick the tires”. Very few people are willing to buy big-ticket items sight-unseen, and there’s not much out there that’s bigger than commercial real estate.

The need to see a property up close and personal often prevents investors from participating in auctions. They mistakenly believe that they don’t have the ability to view and inspect the property when they’re part of an auction.

“Buying a property through an auction does not mean that a buyer must forgo due diligence,” Sharga says.

Auction.com, for example, offers the same documentation and managed site visits as a traditional broker-driven transaction. The physical inspections and other due diligence documents are stored in the company’s fully-secure, online data vault, and all bidders have access to it.

Myth #3: There are hidden fees and non-refundable deposits

There’s a lot of confusion about the fees and deposits required for online auctions, Sharga notes. That confusion has created the myth that most auctions have hidden fees and non-refundable deposits.

In fact, it’s very rare, almost unheard of, for it to cost money to simply participate in an auction. “Usually there’s no charge for bidding,” Sharga says, adding that Auction.com’s fees are paid at the time of closing. “If you don’t end up winning the auction, you don’t pay anything.”

Most auctions for large-ticket items, commercial real estate among them, require good faith deposits. “From our perspective, we believe that deposits protect bidders and sellers,” Sharga says. “They legitimize the bidder pool. Sellers don’t have to worry about whether the bidders are serious, and bidders know the people they’re competing against are genuine competition.”

Myth #4: It’s rigged

A lot of people avoid auctions because they believe they’re rigged by the auction company. They wonder whether they’re bidding against other bidders or if they’re bidding against the auctioneer.

This myth, like other myths, is the result of a lack of understanding about the auction process, reserves in particular. A reserve is the minimum price the seller will accept, and there are many auction companies that participate in their own auctions to ensure the price hits the reserve.

Auction.com, for example, will get involved in the bidding if the highest bid has yet to reach the reserve. “It’s important to understand that auction companies do this because an asset cannot trade hands unless a bid meets the reserve,” Sharga explains. “At Auction.com, the house never places a bid at or above the reserve amount. Our role in the bidding is to manage the process with the goal of meeting or exceeding the Seller’s desired price.”

Myth #5: Only tech geeks can participate in online auctions

If you think you have to be tech savvy to buy and sell commercial real estate via online auctions, you’re wrong. If you have a computer, internet access, and the ability to click a mouse, you can participate in an online auction.

“At Auction.com, we have experts available to guide both buyers and sellers through the process and prevent any technical issues they may encounter,” Sharga says. “We’ve worked hard to make our platform easy to use and universally accessible.”

Sharga contends that technology actually improves the auction process. “I believe technology streamlines the buying-and-selling process,” he says. “It makes its more efficient and it establishes the true value of an asset. It also creates a global platform and gives sellers access to more buyers, and it gives buyers the opportunity to see properties they otherwise wouldn’t see.”