How to Invest in Commercial Real Estate

75 of 79 episodes indexed
Back to Search - All Episodes

Episode #061 - EVERYTHING You Need to Know About REAL ESTATE AUCTIONS!

by Criterion, Braden Cheek, Brian Duck
May 9th 2022
00:00:00
Description

Today our hosts Braden Cheek, Brian Duck, and Joel Thompson with The Criterion Fund discuss everything you need to know to be fully prepared when it comes to buying Real Estate from auction platfor... More

it's not hard and credited towards the purchase price. It is released to the seller and then credited to the purchase price. So the money is literally gone. The title company doesn't even have to have it and think about that if you're a seller and you've got a let's say you have a nice asset not foreclosure, some ugly piece of crap, you've got something people want And you just got 10% of the purchase price. Let's say it's a $6 million $600,000 released in your pocket. You don't even want that cellar or that buyer to buy you just want to auction it again. Like I love this, I got 10% you know and so nobody's motivated to help you at that point you are on your own and whatever you find that's negative on that property, you own it, you will you will find something negative and you own it now Unless you want to forego 10% of the purchase price which is two too painful if you do. I've got something I'd like to auction you. Yeah. Alright what's up and welcome back to how to invest in commercial real estate. Today is an exciting day. Every day is an exciting day because today we are talking about auctions so it's kind of untraditional but you can pretty much buy anything on an auction.

You can you can buy almost anything on an auction and commercial real estate is absolutely no different. Yeah and more and more every day people are deciding to put their properties on auction before it was like the worst of the worst properties go on auctions now, you're seeing normal cash flowing stabilized assets using the auction platform because of some of the benefits or perceived benefits from the solar. So what are some benefits, what, why would you put your property on an auction site instead of just listening with a broker? It's a very interesting seller profile. Do they think obviously, I mean, the only reason might be either to get it done really fast, I suppose right, because it's, it's pretty much done or they think they can make more money. Maybe there's a bidding frenzy or something. I can and this is just my opinion. But I kind of think there's a, you get a broker's opinion of value, You go to the broker and you say, hey, what is my property worth? And they say it's worth, let's just say $7 million $6 million Broker says, Hey, you know, let's set the reserve at six if you're happy with that. But I think we can get enough tensions where we can get this bit up to seven if we get in front of the right people.

But what are your thoughts on that? Yeah, I think there's some potential uh, Perception that you might get a bidding frenzy where people are, they've done all the due diligence and if they just did another 50,000, they can they can get it. And then you kind of let it ratchet up. But I think the big driver for sellers on auction platforms is a guaranteed sale so many times in commercial real estate time kills deals. Interest rates can kill deals and so locking down those buyers and having them commit and getting that deal sold. If you have a, let's say a reason you need to sell this can be a great avenue because of the tight restrictions they put on buyers. Well, we'll get into those restrictions in a second. But generally speaking, there's a couple, there's a couple of sites that we've used in the past. Um and and those sites are pretty good. One of them is auction.com, which transformed into 10 x. The other one is uh real insight marketplace, ri marketplace dot com. I think we've we've been on both of those sites um in the past month, I think we've been on three or four different properties on auction.

All of them we lost at least initially. Yeah, we got a call back on one. But anyway, those two sites you can pay attention to Um and they're always gonna have deals on there. They typically give you a month to 45 days beforehand to look it out, you can see it and there's, you know, you have to get registered once you see it on there, how do you buy it? You get registered And 10x. Is only for these two sites only do commercial real estate. They don't do housing. I think I think they housing portfolio but it's strictly multi family. Right. Well yeah they do multi family. I believe 10 X. Has a sister site that does residential households. Okay for home flippers and things. But. Okay, so let's talk about it. You gotta get registered first and it's not just about signing up your name. They want to know who the bidder is. They want to have entity documents if you're bidding like by a company, they will want to have some form of payment because when you bid they are you're obligating yourself.

And I believe like antenna acts you have to give them A credit card number or something for that. Like a $25,000 retainer in case you bid and don't buy it. They can come after you. Is that right? Maybe they charge stolen credit card fee they didn't charge. I mean they didn't charge us credit card credit risk. Okay. Maybe uh that I know I've done that in the past where I I think it used to be on there. Okay. But um but they don't just let they want proof of funds. Is that well what about proof of funds to to prove that you can actually buy it. Is that part of the registration? Yeah. And it's a it's one of the toughest parts of getting registered to bid is they will only let you bid up to an amount that you have available cash in the bank. Okay. Time out, you know, pause in the play. So this this is this is huge. This is huge. Right? So before you can even put one bid, before you can register before you can do anything, you've got to have a cash equivalent of the purchase price. Well, you you can register with all of your information and now you're registered and you can see the auction. But yeah, before they will unlock you to make a bid to place a bid on a property.

Whatever amount you want to bid, you will have to substantiate those funds in cash. At least. That's my experience or liquid funds. I mean, could it be stock. Yes. Any anything that you can immediately liquidate, that's what they want. What about a term sheet or a commitment letter from the bank That that will help you as well um there because we've we've done that before um where if you have that in hand, they will then, and you can show maybe 30 or 40% of the purchase price and a term sheet. They'll they'll allow that as well. So what I'm hearing here is you've got to be willing and able, you've got to convince these people why you should be allowed to bid on this property with some sort of combination of cash and debt that you can prove to them before they even let you bid. Yeah, they're, they're hyper focused, laser focused on getting these assets closed after the auction. So the idea that just anybody can go throw a bid on it could literally wreck the entire auction if you're not serious. And people, I mean it takes thousands of dollars to underwrite these deals ahead of time and spending a lot of man hours getting ready to bid.

And these are big companies that are bidding. And so if if someone could just come on and ruin it, it wouldn't be a productive platform for people to be on. So they have to ensure that the bidders on there are both serious have done their homework and have the ability to close if and when they win that auction. And so you talked about underwriting, how much time do you typically have by the time it goes on the auction site until the auction actually happens, is that Is there a typical time? Or is it's more than 30 days or I mean, do they typically give you plenty of time to underwrite it. Typically plenty of time, you know, 30 45 days, maybe even 60. I mean from the time we're aware of it, you know, somebody sends us an email, we finally check it out, There's around a few weeks left, which is plenty of time for us to to take that information and throw it into the model. But let's let's get into that because we're right now we're registered, let's say we're registered, we like a property, we upload proof of funds now we're ready to bid. But what do we do? How do we evaluate these these properties? Is it any different than any other property that you might find through a, through a broker? I think it's drastically different depending on the circumstances.

I mean, we, so we have one in contract right now that we lost. Initially they came back to us, we haven't in contract. Now we'll get into the details of how that happened in a second. But it's in, it's in stone wood. Stone mountain Georgia. I've never been to Stone mountain Georgia. We're about to go to Stone Mountain Georgia of course, because we're buying this deal, but there's some, you know, there's some risk involved. So we've never been there were, you can't fly to every site you're bidding on before you do it. That just doesn't make sense. So you've gotta, you've gotta underwrite way more modestly in my opinion. Yeah, Good, good point. You're not, you know, because the auction is the format that it's in that you could get outbid at any time. You're not sure that you're ever going to buy it. So like you say, you're not necessarily going to buy a plane ticket and go fly to this property. You're not going to spend money on property condition reports and all your environmental reports and all of these things because your chances of winning are low. Uh you know, you don't know what price is gonna go for. You don't even know if you want to buy it. You just know that you might want to bid on it. So how the auction site goes about trying to appease potential buyers is that they get the property condition report done, They do a phase one, they do an appraisal potentially uh and they upload all of this into a due diligence folder.

Uh And so that way Uh they can put people at least somewhat at ease that someone's looked at this property. The roof needs replace the parking lot needs 200,000 over the next five years. And they kind of let you know some of this stuff. So that's how it's different and that you're not going to actually do a lot of the due diligence yourself. But some or most of the information you're gonna need to make an informed decision is already uploaded on the site. All right. Yeah. And you have to hedge that knowing the seller of the property paid for that inspection to be done. So, you know, if there's something wrong with the roof, maybe, you know, you should pay attention that if there's, if there's something noted, you know, you really need to be a little bit more cautious than you normally would if you had eyes on the ground if you've got a reasonable inspection period where you can inspect and cancel. We we tried to put our appraisal on this deal in Atlanta and the guy called me, he's like hey you're not supposed to do any inspections. Like this is an appraisal. This is this is this is I didn't know that. He they said that they're super tight on inspections because you you kind of waive the right to any inspections. Like I said when when you're bidding on this it's not just a button that you hit that is a binding contract.

You're signing a lot of stuff. You're paying a lot of fees. You you are buying that if you hit that button and it's not gonna be good if you can't. Yeah. So so let me talk about that some of the negatives that you need to watch out for when you're doing your underwriting. We've already kind of talked about The due diligence process and how you're not going to be on site before you bid most likely. And that you haven't performed all of the reports that you would normally do but you have them. And I'm gonna you say the seller paid for it but I'm gonna assume that 10 x. Let's say is doing their best to have an accurate representation because what would be bad for their their auction site is to have a bunch of sham reports put together by a seller that aren't accurate. It is paid by the seller but I do think that they are trying to be accurate with the representation so they don't get sued later. But there's a couple other negatives. One is you have to agree to their purchase and sale agreement in its current form without any changes and it is written in the seller's favor or in the auction platforms favor. So there's no negotiating on the PS, there is no negotiating on the P.

S. A. And so that you're basically there's no outs, you know, you are waiving your due diligence, you're waiving all of your inspections and you're gonna close no matter what it's that kind of language. But you know what that P. S. A. Says because that's part of the due diligence, so you know exactly what it's going to say before you buy it. Yeah, it's it's it's uploaded. # two is uh there's a 5% buyer's premium fee that you have to add to the to the price. And I think that's a huge benefit for the auction site and a negative for buyers because it's human nature to kind of disregard the fee and say, oh I'm buying it for six million, well 5% of six million is $300,000. It's a lot. Uh And so you're not buying it for six million to buy it for 63. And so you really have to mentally add that that full 5% in and that I think pays for brokerage commission and auction platform fees and things like that. And so that's number two negative is you're getting 5% added to every bid. Okay, So every time you bid, if you win, You win the bid then they're gonna add 5% and that's your price five percent significant.

And like you said, it's kind of sneaky because you'll hit that button and you'll bid six million but it's really six 63. So they don't show you the full price including the fees and they ask you every time you get on the phone with these people. Yeah. And you remember there's 5% transaction fee. Yeah and you don't forget about that 5%. I mean there are hawks on the fee you're paying it. I'm sure people have forgotten before and that's a rough conversation, you know what I mean? They're pissed, everyone's pissed at that point. So number three negative is you have a 30 day window to close if you are in fact the winner. Yeah, that is tough. Most people don't want to be under that kind of pressure. Most lenders are going to take longer than that Every once in a while. They will have an option to extend maybe a 15 day or a 30 day. But my first auction experience, we uh were the winning bid. I wired the money and we immediately engaged the lender and we ordered the appraisal, Well the appraiser was really busy and so he's like, you know I'm I can't get to it, I'm gonna be nine days late and I think it was like $2500 a day penalty.

Uh I think so whatever that is 20 $50,000. And at the time I didn't have any money, I was like oh my gosh, so I called the appraiser, I'm like hey man uh if you got some guys that can work a weekend, I got some money for you and I was gonna pay him have let's say $10,000 just to get it on time $1000 a day. Oh no I can't work my guys over time like that. And I'm like what do you mean? They'll have money for a vacation. Like if they just spend a few extra hours but he wouldn't do it. They were nine days late and I paid 20 some $1000 in penalty. So it's a real burden to fully close a commercial real estate transaction in 30 days. That's number three burden on the underwriting. And would you ever talk to a lender before an auction or or is that kind of like flying out there to see it? You I would definitely, yeah I would I would send the om To a lender and definitely be getting soft quotes, they're not gonna take it to committee. But you you should know what your debt looks like because because of the fourth uh negative thing to underwriting which is when you win, you have to send 10% of the purchase price.

Uh Nonrefundable in cash to the auction platform. You have to wire transfer it to them I suppose. Yeah wire transfer. 10% much time. Do you have to do that 24 hours? They Say 24 hours but they're calling your ass on minute 30 saying where's my money? And then every 30 minutes until they get the money and then when they get the money they won't call you to let you know they got the money. You'll have to call them at that point and say, Hey did you get the money? Oh yeah of course we got the money. That's the big that's the biggest out of all the negatives. That's number one because that money is now pretty much gone now. It is 100% gone because in the P. S. A. At least the P. S. A. Is that we sign, it is released to the seller. It's not hard and credited towards the purchase price. It is released to the seller and then credited to the purchase price. So the money is literally gone. The title company doesn't even have to have it. And think about that if you're a seller and you've got a let's say you have a nice asset not foreclosure, some ugly you know, piece of crap. You got something people want and you just got 10% of the purchase price, let's say it's a $6 million, you've got $600,000 released in your pocket.

You don't even want that seller Or that buyer to buy. You just want to auction it again. Like I love this, I got 10%, you know, and so nobody's motivated to help you at that point, you are on your own and whatever you find that's negative on that property, you own it, you will, You will find something negative and you own it now unless you want to forego 10% of the purchase price, which is two too painful. If you do, I've got something I'd like to auction you. Yeah. And so that's all the challenges, uh, that, that an auction platform presents over a traditional deal. So what does that, what does that mean? There are a lot of sellers that don't want to take risks. There aren't going to have liquid funds in the amount of the purchase price that don't feel comfortable trying to close in 30 days. So you now have reduced the buyer pool, uh, significantly. And there's a potential that you've lowered the competition and you might be able to get a good deal one 100%.

I mean, it's like, uh, it's like a sheriff's auction, You know what I mean? How many people do you know that by houses on foreclosure auction, I mean, it's a, it's a popular way of doing things and if you ask them why they'll say they go through the hassle because they every now and then they find a good deal. It's the exact same thing we're bidding on tons of properties. It's relatively easy to underwrite once you've got the models and the systems and you know what you're looking for. So to download the data, throw it in the model. And then, you know, typically these auctions are 2-3 days, day 1-2, you don't even need to be on the last day. The last hour is really where you need to be on. And it's just important if you're interested to to get a bid in, get a couple bids and it doesn't matter what you think the property's gonna sell for 10 million and it's a five bit five because it shows that you're interested. It shows that you're willing and able, it shows that you're paying attention and if something were to happen to the winning bid or the second winning bid or the third winning bid and your number four, you're gonna be on the short list of man who can we call to to get to buy this property because like you said, the reason sellers are putting this property in the auction format is to get a guaranteed sale case in point we bid on a property a couple of weeks.

Now it was in april it was a Wednesday and we lost the auction and we're, you know, we're watching it and then there at the end if somebody placed a bid in the last two minutes they extended another two minutes and you know you're sweating, you're like man where do we go? 61 50 okay, hitting. Are we sure I'm hitting the button, I forgot the 5%, you know whatever. But anyway we lost a bit walk out of lunch with our heads held low next day, we could call back and it says hey this is so and so um from the auction house, are you still interested in Stone wood mountain? I'm like yeah sure what's what's going on? Well the guy who won the purchase or the guy who won the auction wants to renegotiate the purchase and sale agreement and we don't do that is what he said. Okay well what's it take and he said if you can honor your bid uh we'll sell it to you sign ups a send me the money. So I you know we circulated phone calls, hey guys you know we we have this. I don't think we did. We didn't honor our bid. Didn't we go lower.

First of all, I mean you gotta you gotta seize the opportunity, you have to be able to spot an opportunity and grab it. So we did we did you said hey lock it up at six to and uh send me the money, sign the contract, it's yours and us. You know being the way we are we're like what about 61? He's like well I already got a signed contract at 61. I'm like really? That's interesting. What if we're at 61 50? He said well that's that's more than 61. Sign it and send me the money and it's yours and we and we locked it up at 61 50 we were buying the deal on May 16th. So interesting. I want to comment on that because it's a good story and I we think it's gonna be a good deal. None of what the person said to Brandon on the phone was necessarily true. We don't know. And so that that brings me to another point about auctions is that the auction house will and does frequently bid against you. And so now you think oh I'm I'm I'm bidding and there's all these other bidders, maybe not, maybe they're just bidding and then you're bidding against yourself and then they bid and then you bid against yourself again.

And then to me that it seems unethical but do they at some point, do they stop bidding? I mean like if the reserve is hit or something like that. I believe that they are not legally able to bid once the reserve is met. I think somewhere in the paperwork it says, hey we have the right to bid up into the reserve amount. About reserve what reserve the reserve like any auction is where the price has been met. And at that point, you know, the next price the seller accepted the seller is putting in a way that the minimum that I'll sell it for is this much correct? And if it doesn't hit that the property isn't sold and they let's clarify what it is, is it's the price that the seller has to sell you the property at, correct. If you come in under the reserve and no one meets the reserve, the seller could still decide, okay. I knew I I knew I wanted 66 million was my reserve price but they did 58. I'm gonna go ahead and sell it to him at 58. That's possible. Which which is huge, right? Because if you're thinking, oh the reserves not mad. I'm good.

I'm getting in a bid to be competitive. Like bryan bryan and Joel said I'm just going to be competitive and show interest and then boom you bought a property. Yeah. And so now you got to know you you could still be liable for honoring your bid even when the reserve isn't met if they decide to sell. But but that that's the trigger is the reserve price. I don't think they bid once the reserve is mad because it's a live deal. But in the case of our deal, you know, could they have been all the way up to the reserve. Was there another bidder that one that said they wanted to renegotiate? I don't know maybe there was maybe there wasn't was there another sign contract at 61? I don't know. I don't know legally if they have to tell the truth on all that. So for us we always lean lean back on our underwriting and we had gone into that deal saying that our we wanted to pay six to I believe was the top dollar. And and so we got it for 615. We had a chance to get a deal. It's not easy to find deals and and get them under contract. So we did it. But let me think of what a couple other things like Brandon was saying the auction is about a three day deal.

But really the main bidding gets going in the last two hours and even the last two minutes. As long as someone puts a higher bid and it gets keeps getting extended two minutes, two minutes. So the auction can theoretically go on forever. It only gets extended two minutes, two or 3 minutes, maybe five. Because they figure everybody at this point is right there in front of the computer ready to go. If they see a higher bid they should be already you're already an expired time expired. And they lower the bid increment as they get closer to the reserve. You know when you're bidding, I'm sorry you can't just go up by a dollar or $2. There's a minimum 50,000 or 100,000, there's a minimum. And a maximum there they said that they'd increment, oh and a maximum. Well it it just is, it's a 250,000. You can go up by $250,000 increments. You can't bid whatever you want. You have to bid the increase and you're saying as it gets closer to the end, that increment, correct that and that's that's why they're allowed to bid right? Is so they bid up to the reserve, they get, you know, 1 to 3 to five fires up to the reserve price.

And then that's where you know, we believe they have to stop bidding is, is when that reserve price is taken off and it says in the auction platform, hey next bid uh the reserve is met and you are buying that property. It's very clear and it's scary And it makes sense though to, to lower the big bid increments because on a 5, $10 million 10 million, 200,000. Okay. But if they keep lowering that and now the next bid can get it for 10 million, 10,000, 10 million, 5000. Like it just keeps people engaged. And it drives that price up. If I was in a position where I was bidding and it started to do that, I'm probably just going to bow out because It's like that one site where it was like penny auctions and these people would get involved and they'd be bidding a cent or two cents, but the bidding never ended and they thought they were gonna get the TV for 40 cents, but pretty soon there's just one more penny and then they just can't keep from bidding it up because well, one more penny, I gotta see if I can get it. Well, no one stops because there's some cost.

So I wouldn't be in favor of getting involved in a deal like that. But what else we got on on the auctions? Yeah, we've, we've personally bought several deals on auction platforms on these sites specifically and they've worked out great, we are not without their challenges or without the unknowns. But yeah, we have been able to make money on auction sites. Yeah. So I think it's just another, you know, another little spot you're getting deals from, we've talked, you know how to find deals, but this is just another, you know way if you or cash, you know, rich and can show the proof of liquid funds up to the bid amount or even if you're not, but you can find a partner or somebody who says, hey, you know, if I could use your proof of funds, then I can make you a great deal. If I get this property, whatever. Be creative with it. But this is a great way to find alternative deals that could be perfect for, you could be a lot less competition. Um, It could be some really good deals here. Alright. I think that's it. Well, that's it. Make sure to like and subscribe on the Youtube and facebook share if you really I loved it and make sure to sign up for our investor list.

It's how to invest in CRE dot tv and there's a button that says sign up for our investor list. It will take you there and you will get access to investments just like that one in your email box all the time. Alright guys, until next time. Thanks. Thanks.

Episode #061 - EVERYTHING You Need to Know About REAL ESTATE AUCTIONS!
Episode #061 - EVERYTHING You Need to Know About REAL ESTATE AUCTIONS!
replay_10 forward_10
1.0x