5 Auction Myths Investors Believe in Commercial Real Estate

Whether you’re an old hand at buying and selling properties or you’re just dipping your toes into the real estate investment market, you’ve probably heard your fair share of complaints — or outright horror stories — about commercial real estate auctions. While it’s true that they can feel risky, it’s also true that no commercial investment is completely risk-free.

                                                                                                                 Photo Credit:   Your Training Edge

                                                                                                                Photo Credit: Your Training Edge

 

It turns out that much of what real estate investors take for gospel when it comes to commercial real estate auctions is actually not true at all, or perhaps only partially true. There are lots of myths about the process that should be dispelled once and for all.

1. If a property’s up for auction, there’s something wrong with it.

This myth has gained a lot of traction since the housing crisis, when many homes in foreclosure hit the auction block in a state of disrepair as they were abandoned by homeowners and banks alike. While it is true that some properties may be distressed, most commercial auctions feature buildings that are fine, particularly if they have had tenants in them for the duration. In the world of commercial real estate, an auction is merely a business choice the seller makes to get the best price or the quickest sale — it’s not necessarily a measure of last resort.

2. You can’t look around before bidding.

This is another myth that has grown larger than life since the Great Recession, and it’s been popularized on shows like HGTV’s Flip or Flop, in which house flippers peer through the windows and surreptitiously drive by abandoned properties to try to guess what’s going on inside.

Luckily, a commercial auction is the owner’s choice, and they usually want to attract as many buyers as possible, so they’ll provide all the information you need to do your due diligence before bidding.

3. You’ll get swindled with hidden costs.

Speaking of due diligence, savvy investors work with professional commercial real estate auctioneers and a smart legal team to make sure their “i”s are dotted and their “t”s are crossed. You’ll know going in if there are liens or back taxes, and buyers almost never need to pay a fee to participate in the auction.

You may have to prove up front that you can back up your bid in cash, but you should never find yourself in a pay-to-play situation when you work with a reputable auction house.

4. Buying at auction is preying on other people’s misfortunes.

This myth arises from the misguided idea that auctions only happen when the bank forecloses on a property. While that may sometimes be the case, it’s equally as likely that commercial auctions are the method of choice of a savvy seller. Even if a commercial property is in foreclosure, it’s incredibly unlikely that a mom-and-pop shop is being pushed out of business. Instead, the owner probably made a calculated move to get out of their investment. There’s no moral wrongdoing in buying at auction.

5. All auctions are rigged.

If you’re worried about dishonest sellers driving up the price by planting ghost bidders or other underhanded tactics, relax. Commercial real estate transactions are highly regulated, and reputable auction houses couldn’t stay in business if they cheated buyers — word would get around too quickly for that to be a viable business practice.

If you’re concerned about how it works, attend an auction and gain a thorough understanding of the process before you decide to participate. As in most things, knowledge is power!

If you’re interested in commercial real estate auctions, do some research beforehand and talk to an auction house to better understand the process. While not everyone loves the thrill of the auction setting, it’s no more or less risky than any other commercial real estate purchase when you know what to expect.

What other myths would you add to this list? Have you found any of the above to actually be true?

Article Resource: Bigger Pockets