Pros and Cons of Selling a Commercial Property at Auction

The Auction Cons

There are several advantages and disadvantages of selling a commercial property at auction.  Naturally, a commercial property auctioneer won’t tell you about its cons.  It is important to understand these disadvantages in order to make an informed choice.

• Commercial property auctions are like marmite.  Some buyers don’t like the commercial property auction process.  The competitive nature of bidding and the inability to secure a mortgage within 28 days for an auction purchase can put off some buyers.

  This limits your pool of potential buyers – as your property is only being shown to either cash buyers or those with the ability to get a commercial property bridging loan, typically at a 1% interest rate per month.  The winning buyer must ensure that he/she can act with the speed required to complete the purchase or risk breaching the rules of a legally binding sales contract.

• Price Risk: Sold! But at what cost? You might get less than market value.

• Low guide price – to maximise interest, the property auctioneer will recommend that you put in a low guide price.  The reserve price mustn’t exceed 10% above the guide price.

   

  If your property has attracted very little interest, it may not achieve a sale or sell at a very low price.  So, let’s say that your property’s suggested guide price is £90,000, then the reserve price may not exceed more than £99,000.  The reserve price is the price you are legally obliged to sell.  You could end up giving away your property if you aren’t careful.

• It can be a gamble – you might tempted by the auctioneer’s enthusiasm to set a very low reserve price to create the buzz, interest and excitement in an auction room.  This can work for you, or it can backfire big time. 

  You will legally commit to selling your commercial property in an auction at a price you aren’t happy with.  Are you comfortable with making these sorts of risk/reward decisions?

• You are expected to pay upfront fees.  These include an auction entry fee and legal fees for preparing contracts and searches. 

• Auctioneer gets paid first.  This is probably why they don’t tell you this.  As soon as the hammer falls, they have secured their commission well before the completion date.  It is your commercial property.  You have taken a risk by putting in a very low guide price; it has now sold, and it seems unfair that their firm gets paid before the seller.  You’d be one of the last people to get paid. Auctioneer is the first, your solicitor is the second, and you are the last.

•  There is no guarantee that your commercial property will sell at auction.  If there are no bids or a few bids that don’t meet the reserve price, then the auctioneer will announce that anyone interested to get in touch. 
  
  Unsold auction properties have a stigma attached to them.  You will get offers well under the indicative guide price.  You can try and sell again at the next auction and incur all the upfront costs again, and no guaranteed return.

• The frustrating wait for the next auction.  Auctions are held every two or three months.  You also have to allow one month of marketing before the auction to generate any interest, conduct any viewings and allow potential bidders the time to download the legal pack and so on.

  If you need to sell right now, you can’t take the risk of selling with an auction and wait for up to two or three months for the next auction.

  There’s an alternative way to sell for cash and have money in your bank account within 3 weeks or quicker.