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Brokerage v. Auction: Selling Minority, Partnership and Fee Simple Interests in Real Estate By Wohl, Todd*
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Why is this important to receivers, trustees, creditors, debtors and the scam parties? Because all the court- appointed professionals and their counsel run the risk of underselling the assets, and not creating a competitive and transparent sale process for any and all parties to participate. This can result in leaving money on the table and not fully discharging their responsibilities to their clients and the court. There are two methods to sell real estate and Partnership Interests: Brokerage and Auction. Each has its own rules and its own advantages and disadvantages. The Brokerage Option The steps to selling real estate using the brokerage method involve using an individual or firm who charges a fee or commission to sell the real estate. The sellers of the real estate enlist a broker, who is expected to act as an unbiased third-person facilitator between the buyer and the seller. Brokerage firms tailor the listing term based upon the demands of the seller. Both commercial and residential properties are listed online through a regional or local Multiple Listing Service, or “MLS.” The MLS then feeds this information to companies such as Zillow, Realtor.com, Trulia, Loopnet and Costar and dozens of other for pay “public” websites. For many brokers who wish to advertise their properties, online listing services function as a powerful and effective marketing tool for both commercial and residential properties. Ninety-nine percent of buyers start their search on the Internet via countless number listing websites all of which who pull information from the MLS. These databases provide easy access to real estate information ranging from photos, historic listing information, city and state demographics and so much more. Interested buyers will then be able to search and find those that fit their criteria to attend showings, and potentially purchase. Understanding how a broker is going to manage the listing, sale and negotiation process is the most important factor in choosing the broker, not the price! Creating a process of marketing, review, negotiation strategy, and pricing disclosure strategies between the seller and the broker is critical to the success in receivership sales. Accepting the highest and best offer in many situations would leave “money on the table” and unfair opportunity for anyone who submits an offer other than the highest buyer. If the broker does not allow all-inclusive countering and multiple countering opportunities to the buyers, it leaves the Receiver open to question by the Court. The Court may perceive the Receiver as not providing equitable opportunity to purchase by all buyers. Therefore, after enlisting a broker, it is of utmost importance that open communication is made between both sides to ensure that the sale and negotiation process is transparent. The broker will work with seller to assemble underwriting and due diligence materials (including any and all state required disclosures, financial reports, PTR’s, accountings, environmental reports, operating agreements, rent rolls, IRS k-1’s) at the start of the marketing campaign, which can be made available for review in a data room or online. The next step for a broker is to provide the seller with a marketing campaign over the course of the listing. The broker can provide metrics of buyer interest on a weekly basis. Not only is the marketing campaign custom-tailored to each piece of real estate, it must be unique to the proper demographics and target audience. Although brokers may utilize different forms of marketing, standard exposure includes signs, brochures, and the MLS listing to showcase the real estate and upcoming showings. Direct mail marketing materials such as postcards and direct mail are also other materials that can be used. In the digital world, having website and social media accounts enables brokers to further market featured real estate using Internet SEO techniques (Search Engine Optimization). SEO can help websites rank higher on search platforms and generate organic reach, clicks, and views through paid campaigns. Maintaining that active Internet presence and flow of traffic via YouTube, Facebook, Twitter, and other platforms functions as another touch point and method of interaction with the audience apart from telemarketing. Apart from digital marketing, a broker’s market knowledge and relationships in the industry play an important role in selling the real estate. Generally speaking, a broker minimizes out-of-pocket expenses when marketing the real estate to maximize profit. Most sellers do not have knowledge as to the broker’s marketing budget. A low marketing budget may affect the sale price. If offers are not presented within 45 days, the broker must advise and suggest alternative marketing and pricing strategies. The brokerage process creates little urgency on the buyer’s behalf if the real estate becomes a “stale” listing, in other words, not sold in the finite period of time standard for the market you are selling in. Because properties become less marketable and less valuable over time, failing to adjust the price accordingly will negatively affect the marketability and value. When interested parties see a listing which has been on the market for an extended amount of time, thoughts such as “What is wrong with it?” or “This real estate must be overpriced” are the most common comments. Price adjustments are necessary because of the changing market forces, the economy, psychology of buyers, financing and, most of all, motivating buyers and agents. There is no doubt that the timing from when real estate is listed can dictate how quickly or whether or not a successful sale can be made. Once under contract, the brokerage process allows the buyer the opportunity to conduct due diligence, obtain financing and property condition analysis. Additionally, the buyer will determine if it qualifies for financing. The buyer has the right to cancel the contract anytime as stated within the terms of the contract. Cancellation contingencies may include property condition, environmental impacts, conditional use permit expirations, change of use, city requirements for transfer to name a few. These conditions of sale provide for a uncertain closing date and price. Compensation to the listing broker is paid by the seller and is calculated as a percentage of sale price which ranges from as low as 1% to 3%. The commission is negotiable and based on the estimated sale price at the time of contract execution. Typically, the buyer’s agent will be paid, in a similar commission structure, by the seller. In some circumstances, the buyer will compensate their broker. Therefore, a total commission may range from 1% to 6%. The listing broker may provide for a discounted commission if dual agency occurs. The Auction Option Whether you use an auction to sell a Picasso, Ferrari, IP, Real Estate, Business Asset, Minority Interest, auctions undoubtedly make the asset the star in the marketplace! Auctions create a sense of urgency by establishing a definitive sales date, terms of sale, and an equitable sale process for all buyers. Using an auction platform brings in that competitive bidding environment that any court will consider an equitable, transparent sale process. The timeline of an auction will be suggested by the auction company and is based on a multitude of factors for the required exposure of the real estate and minority interest. Article 9 sales and nonreal estate may have a 30-day or less marketing timeline. Rule of thumb is 60 to 90 days for real estate plus the standard escrow (closing) timeframe of 15 to 60 days. Factors for consideration for the marketing timeline include court requirements, type of real estate, location of real estate, depth of buyer pool and buyer underwriting requirements. If the Receiver or Court approves, allowing pre-auction offers will decrease the sale timeline. Sellers are free to customize their auction experience by choosing auction pricing options which include Published minimum bid price “reserve”, Absolute (will sell at any price), and No Reserve (no minimum price with the option to cancel). These strategies will have a marked effect on motivating buyers. A published minimum price allows sellers to state a minimum price the real estate or minority interest will be sold. The seller is committed to selling at or above the reserve price, though only they have a right to sell below the reserve price. A published minimum price is crucial to pricing, because it is a motivating starting point for buyers interested by creating bidding momentum. On the opposite end of the spectrum are Absolute auctions which are the most powerful way to find market value because the real estate and minority interest will sell to the highest bidder at market value without limitation by the seller and may be used in conjunction with court confirmation. A sophisticated and experienced auction company will provide multiple bidding platforms which will be tailored to the seller’s objectives and the real estate and minority interests potential buyer demand and demographics. Bidding platforms such as Sealed Bid, Multi-Round Sealed Bid, Onsite, Online, Telephonic, Live Online and In Court each have their benefits and may be used in sequence or in parallel. The auction company will provide suggestions as to which platforms to use based on a thorough analysis of real estate, potential buyer demand and depth of buyer pool. The terms of sale and qualification process will be clearly outlined in the due diligence materials for buyers. Bidding requirements include, a “live funds” registration deposit, proof of funds to close and lender approval/qualification letter. Underwriting and due diligence materials are provided by Seller (include any and all state required disclosures, financial reports, PTR’s, accountings, environmental reports, operating agreements, rent rolls, IRS k-1’s) at the start of the marketing campaign and available for review in a data room or online, therefore, buyers are prepared and their offers are fully vetted when providing their offers. The auction process allows the seller to limit or eliminate contingencies when selling real estate and minority interests for Auction day offers. Auction day bids are “as is, with all faults.” Pre-Auction offers may have standard contingencies with the requirement to remove the contingencies 48 hours prior to the auction date. The benefit of excepting Pre-Auction offers will be on a case-by-case basis, though buyers may see value in a contingent offer (especially for residential real estate) and as such, bid higher. The seller has the option to require the auction company to partner with the broker if the seller has a brokerage contract in force for the real estate. It is very common that both the broker and auction company work together (and are jointly compensated) to market and auction the real estate. The benefit of this partnership (assuming the real estate was listed for sale by the broker for some period of time prior to the auction company) is the continuity of buyer information and overall marketplace metrics which the auction company would not be privy to otherwise. Compensation to the auction company is different than brokerage. The buyer will pay a “Buyer’s Premium” to the auction company. This is a standard auction industry method of compensation: the buyer’s premium is a percentage based on the sale price, which is added to the highest bid hence, the contract price. The commission ranges from as low as .05% to 4%. The commission is negotiable and based on the estimated sale price at the time of contract execution. Typically, the buyer’s agent will be paid a commission of .05% to 2.5%. The Global Marketing Campaign A global marketing campaign is the cornerstone of any auction. A global marketing campaign targets buyers on a local, national, and global level to proactively generate interest and bring buyers who may be interested in submitting a bid for the property. To market, advertise and promote the sale of the real estate and attract the right buyers, regardless of whether brokerage or auction process is chosen, a broker or auction company must provide a detailed and exact global marketing campaign. Using such a campaign not only allows the receiver and the sales professional to stand in court and defend the sale price of the assets, but also achieves global market awareness which will find the highest and best price. This global campaign includes identifying demographics and targeting geographic locales. Custom designed marketing collateral and materials such as signs, brochures, email blasts, and direct mail must be created and utilized. Brochures and offering memorandums should be available at opens houses and digitally on a website, and email blasts should be scheduled to agents, brokers, and buyers. Telemarketing, social media platforms, and networks of brokers and other public relations are other facets of a global marketing campaign. As mentioned before, online listing services are where most of initial searches commence; therefore, providing high quality videography and photography is crucial for both brokers and auction companies. Nowadays, Internet SEO (Search Engine Optimization) with online search platforms and social media platforms also proves to be a useful tactic in capturing the most possible Internet traffic. Brokerage v. Auction There are key differences and drawbacks worth noting when deciding which method should be used to successfully sell an asset. Where the auction process actively brings in buyers, the brokerage option passively waits for interested parties to reach out and express interest. This process can be compared to a store trying to sell their products. The more passive method allows the shop owners to display their products, and simply wait for people walking or driving past to step in and take a look. However, being proactive in reaching customers is key to marketplace awareness. This proactive method creates a sense of urgency with buyers – a “one day, one chance” opportunity – and provides affirmation that the seller is committed to the sale. Whereas a brokerage sale of real estate can sit for an indefinite amount of time on the market until it expires, real estate auctions provide a definite date for sale which motivates buyers to act quickly. Buyer interest and excitement increases because of the perceived value and opportunity that only an auction can generate. A property which has been languishing on the market is most likely not priced equally to what the market is willing to pay; an auction guarantees that this market value will be found. In a brokerage, however, buyers have one year or whatever amount of time the contract with a listing broker states (anywhere from 3 months to 1 year) to adjust their purchasing times to the market conditions and make these real estate purchasing decisions. Because properties are less marketable and less valuable over time, failing to adjust the price accordingly will negatively affect the marketability and value. Real estate which has been on the market for an extended amount of time causes buyers’ and brokers’ thoughts such as “What is wrong with it?” or “This property must be overpriced” which may impact market value. Price adjustments are necessary because of the changing market, economy, psychology of buyers, and financing, to name a few. There is no doubt that the timing of using an auction versus brokerage can dictate how quickly a successful sale can be made or whether there will even be a sale. Whether you choose to auction or broker real estate, minority interests, or any other type of asset, the selling process in not one dimensional. Brokerage allows for unlimited time on market. Auctions provide a certainty with a scheduled sale date. Holding time must be a factor when selling real estate. Time can work both for and against sellers. In the end, being well-educated on how both auctions and brokerage work can benefit the Receiver and ultimately the creditors. *Todd Wohl is the Senior Partner of Braun International, Premiere Estates Real Estate Group, Braun Minority Interest Market Exchange “MIMX” with headquarters in Los Angeles California with 2600 brokers, partners and specialists and offices in 48 states, Mexico, Caribbean and England. Todd is a licensed real estate agent, a trained auctioneer and is a certified appraiser with the American Society of Appraisers. Braun International was founded in 1908 in Cleveland, Ohio. Visit use at Braunco.com, PremiereEstates.com, Braunmimx.com If you are managing one of these properties as a receiver, you have some difficult choices to make. Taking a long view of valuation can help you avoid squandering the potential value of the property. Safety, Operations, and Compliance |