This could include; property type or location, cost, marketing strategy, auction date, whether they have an existing relationship with those working in the industry or the level at which the reserve price can be agreed. A seller will also consider an auctioneer’s success rate, as this percentage figure will provide a level of certainty that the property will be sold.
Good communication is fundamental
Whatever the requirements when selecting an auctioneer, effective channels of communication must be established early on, so that all of the parties involved in the process work together. The auctioneer must be robust with their strategy and reactive with their advice in order to increase the levels of trust and develop a strong working relationship from the off.
In the current market we are often instructed by a variety of parties and it is not uncommon to be instructed on a consensual basis by the borrower and their lender, whilst on other occasions it could be part of a wider and more complicated relationship where a lender, joint LPA receiver, asset manager, managing agent and a joint agent all have an advisory or decision making role: not to mention the seller’s solicitors legal viewpoint. These more complicated advisory situations are rare, but in this market we are frequently instructed on properties where capital receipt will be significantly below their 2007 valuation level, so it is vital that the disposal process is handled with a strong hand on the tiller.
The benefits of a low reserve price
For example, at a recent auction we were instructed by the joint LPA receiver to sell a multi-let mixed use retail and office building in Nottinghamshire. We had offered the same property for auction six months earlier without any success, mainly because at the time the seller was unable to accept our final reserve recommendation. Sometimes a secondary property like this with significant financial liability attached to it can be very difficult to value as it can make the purchase price look insignificant. As such the auctioneer will usually require the seller to set an artificially low reserve price. These can be difficult discussions and it is down to the skill and experience of an auctioneer to communicate this strategy to their client so that they understand that this would be the best approach and ultimately to their advantage.
However, at this second auction we were better placed to justify our reserve recommendation and as the auction day drew closer it became abundantly clear that the property would sell for more than the pre-agreed reserve price. As we suspected, this pricing adjustment had created an enormous amount of interest.
Pre-auction offers made - but auction remained the best path
In the week leading up to the auction four separate parties each made an offer to buy the property prior to the sale date. On the face of it you would think this was good news and agreeing a sale with the highest offer (at over 30% above the pre-agreed reserve price), would provide our client with certainty of sale at a price significantly above the reserve and higher than the expected price that the property had failed to achieve in an auction six months earlier. However, our client needed to demonstrate that they had achieved the best price available and due to the circumstances surrounding the sale, the auction room, in our opinion, was the most appropriate platform to provide them with the audit trail and transparency that they required. Furthermore, there were 20 other interested parties who we would need to contact in order to give them an opportunity to bid before the sale. Therefore our best advice was to recommend that the property remained in the auction at the existing reserve price.
The joint LPA receiver was initially in agreement and instructed us to proceed as advised. However, during the course of the joint LPA receiver reporting to the lender our advice was misinterpreted and because the lender had written off a significant banking loan in order for the reserve price to be agreed, the lender was not prepared to agree to the original price point. As a result, our revised instructions were to withdraw the property from the auction and sell to the highest of the four pre-auction bidders.
We believed that this approach would exclude a number of willing and able buyers, and therefore reduce the price.
We opened communication lines between the receiver and lender
To guide the client in what we believed would be a better and more successful conclusion, we went for an unusual approach and asked the receiver if we could speak directly with the lender. By doing this we were able to provide them with a detailed explanation of the auction process and why their approach would be detrimental to everyone’s hard work and in particular their disposal requirement. We also used the discussion to understand their operating constraints, in this instance, whereby they could not set the reserve price at any less than the lowest pre-auction offer.
This simple discussion ensured that the reserve price was increased by only a small amount so as not to put off any potential buyers and to ensure the transparency of the auction room was maintained. By aligning these interests we created the optimum conditions for an auction sale of this property, which sold in the room to one of the four pre-auction bidders for £45,000 more than any of the four pre-auction bids.
Adopting this approach meant were able to negotiate with all of the parties involved in the transaction, ensuring a successful, joined up and transparent process with the auction team at the helm.
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