How to Spot the Hidden Gems in Property Auctions
Property auctions have become immensely popular among members of the commercial real estate investment community due to the benefits they offer both property sellers and buyers. For sellers, auctions spark their competitive nature, and, if they do things right, their properties can potentially trade above the bottom-line price.
Also, these properties offer sellers quick closes and eliminate the due diligence aspect of escrow. For buyers, auctions offer the opportunity to acquire assets with less competition than those they acquire through the traditional process. Moreover, since many lenders are also sellers on auction platforms, properties are often offered with lower pricing expectations.
However, there are many different markets within the county, each offering its own unique benefits to landlords. Some offer value-add opportunities, while others provide more stable investments. In this article, we want to introduce you to one of the safest and most desired communities within the county – Irvine – and outline why investors should consider this city for their next acquisition.
Tips to Shopping Auctions
However, identifying a valuable asset on an auction platform can be tricky. Many assets promoted on such platforms have no value-add opportunities, are located in declining markets, and have underlying issues that could pose financial threats to investors. To aid those interested in pursuing such opportunities, Eric Paulsen has outlined five tips for spotting the “hidden gems” in auctions. Paulsen, the founder and current CEO of Topside Real Estate, previously served as co-CEO of Auction.com. His experience in the sector has given him direct insight into what investors should look for on auction sites.
Tip #1: Know who the seller is!
When searching for properties that you might be interested in pursuing, you should first identify who the seller is. Prospective buyers should limit their interest to properties with logical sellers, such as banks or special servicers. You also want to ensure that the current owner is real and motivated to sell before spending your time and money on due diligence.
For example, property owners often use auction platforms as a last resort to dispose of their assets. These sellers tend to have unrealistic expectations, especially regarding price, and their properties can sit on the market for an extended period of time. These irrational sellers tend to offer properties that are unlikely to trade, and you should not waste your time on due diligence researching these assets.
Tip #2: Look for the upside!
It is imperative to understand what you can do with a prospective property. Most properties sold at auctions are value-add or opportunistic – that is, these properties typically require extensive rehabilitation to optimize their potential. Before the auction, most lenders (and alternative auction sellers) are unwilling to spend money to retrofit or convert such properties. Savvy investors, on the other hand, have an opportunity to increase their return on investment (ROI) by acquiring these properties and increasing their overall value through renovations.
Therefore, when analyzing an asset, you should always identify an exit strategy. What is your plan to recapture the lost value in the property? What is your endgame with the asset? You should outline these details before you acquire any property.
Tip #3: Identify a property in a good market and ask why it’s for sale!
When it comes to real estate, it’s all about location, location, location! As consumer trends shift among the U.S. population, so do CRE trends. Buyers must be aware of how these trends impact the potential earnings of assets. Therefore, investors should always look at the demographics and population growth of each asset’s surroundings. Think about this philosophy: We are down today but will be up tomorrow. Look for assets in markets that will rapidly recover.
Additionally, investors should understand where the seller’s pain point is and determine whether it can be resolved effectively and inexpensively. Conducting thorough due diligence and underwriting will reveal whether the property is a real hidden gem.
Tip #4: Find a property that institutional buyers cannot participate in!
Most institutional buyers must follow an acquisition process. For example, they must be allotted a specific amount of time after a purchase and sale agreement (PSA) is signed to conduct due diligence. However, an auction does not offer such luxuries. Instead, buyers must be ready to close at the point of sale. As a result, institutional buyers are generally unable to participate in auctions, allowing non-institutional buyers access to otherwise unavailable properties.
Tip #5: Follow distress, and you will find opportunities!
As mentioned, core assets are not widespread at auctions. Properties found on auction platforms are often distressed and require attention from an experienced investor to capture their potential. These distressed properties, if managed correctly, can provide you higher returns than many assets found on-market. Therefore, investors with the experience and expertise to leverage opportunistic assets to favor their returns will benefit most from auction platforms.
Getting Started with Auction Platforms
There is no one way or right way to leverage an auction platform because there is no one winning bidding strategy. Instead, investors must identify a strategy that best fits their business model. However, all participants should follow a few general rules: Always remember to bid at a comfortable level because you need to be able to act, and always conduct thorough due diligence on the front end to reduce the risk of acquiring a property that becomes a financial burden.
If you are interested in learning more about participating in an auction, contact Eric Paulsen today to learn inside tips from an industry professional.