Commercial Property. Explained. | A CBRE Private Wealth series

By Ingrid Filmer
Senior Managing Director, Capital Markets – Private Wealth, CBRE

The short answer: By the night before a commercial property auction, your due diligence should already be done. Tonight is about making sure the practical pieces are ready: your bidding limit, finance, purchaser entity, deposit, contract, approved terms, registration, signatories and backup options if your first-choice property gets away from you.

The night before is about readiness, not research
Commercial property auctions move quickly. If you are the successful bidder, you generally do not get to go home and decide whether you still like the property. You need to know what you are buying, who is buying it, how much you are prepared to pay and whether you can satisfy the contract immediately after the auction.

That is why the best use of the night before is not another five hours of internet searching. It is a final readiness check. Your lawyer should already have reviewed the contract. Your finance position should already be understood. Your purchaser entity should already be established. Your maximum price should already be written down.

And one more thing: do not put all your eggs in one basket. If your number-one property runs beyond your limit, there may be a number-two or number-three property in the same auction or another like-for-like opportunity available elsewhere. Knowing those alternatives before the auction makes it much easier to stay disciplined.

1. Know your first choice, but also know your alternatives
Before auction day, look at the broader market. What else would you buy if this property sells beyond your limit? Are there other properties in the same portfolio auction? Is there a comparable asset being marketed privately or going to auction soon?

Rank the properties you would genuinely be comfortable owning. Work out a maximum price for each. That gives you options and reduces the risk of becoming emotionally attached to a single asset simply because the bidding has started.

A commercial property auction is not a competition you need to win. It is an investment decision. Sometimes the best decision is to stop bidding and move to the next opportunity.

2. Confirm your absolute bidding limit
Know your maximum price before the first bid is called. That number should reflect the property’s income, lease, tenant, comparable sales, your required return, the amount of equity you want to contribute and the finance available to you.

If you have finance pre-approval, confirm exactly what it means. What is the maximum loan amount? What loan-to-value ratio is the lender expecting? How much cash will you need to contribute at your maximum purchase price? Is the approval subject to valuation or any other conditions?

Write your walk-away number down. Auctions create momentum, and it is very easy to add another $10,000 or $20,000 because another bidder is still going. A number decided calmly the night before is usually more useful than a number invented in the heat of the auction.

3. Make sure the purchaser entity is correct and ready
Know exactly which entity will be written on the contract if you are successful. Are you buying personally, through a company, a trust, an SMSF or another structure? Have your accountant and lawyer confirmed the entity and the exact legal name?

Do not assume you can bid in one name and easily change the purchaser later. Nomination rules, duties and tax consequences can differ depending on the state and the transaction. The safest approach is to have the correct purchaser established before you bid.

Also confirm who is authorised to sign for that entity. This is particularly important for companies and trusts.

4. Have the contract and legal documents reviewed
Your lawyer or conveyancer should have reviewed the contract before auction day. You should understand the title, easements, restrictions, lease, options, rent reviews, outgoings, guarantees, deposit, settlement period and any special conditions that affect the purchase.

If there is a legal issue you do not understand, resolve it before the auction. Auction transactions are generally intended to proceed on the contract terms once the hammer falls, unless a different position has been agreed beforehand.

The night before is the time to reread your lawyer’s advice and make sure you understand any issue that should affect your price. It is not the time to send the contract for its first review.

5. Make sure the deposit money is actually accessible
This is a simple point, but it causes unnecessary stress. Under many commercial auction contracts, a 10% deposit is payable on the day, subject to the particular contract and any variation agreed before the auction.

Make sure the money is in an account you can actually access. If your deposit is in a term deposit, an account with transfer limits or an account requiring multiple approvals, deal with that before the auction starts.

If you only have a 5% deposit available, or want to pay the deposit in a different way, request that variation before you bid and obtain written approval. Do not assume the vendor will agree after you have become the successful bidder.

6. Get any different terms approved before you bid
If you need something different from the advertised auction terms, raise it in advance. That might be a 5% deposit, a longer or shorter settlement, a particular purchaser structure or another contract amendment.

A request is not an approval. Make sure the variation has been accepted and documented before the auction. The auctioneer and selling agent need to know which terms apply to your bid, and your lawyer should be comfortable with the agreed position.

Trying to renegotiate after you have won the auction puts you in a very different position.

7. Register to bid and choose how you will participate
Complete any bidder registration required for the auction and understand the process before the first lot is called.

At a CBRE auction, buyers may be able to bid in person, by phone or online, depending on the auction arrangements. None is automatically better. Choose the method that will help you stay calm and follow your plan.

I personally like bidding in the room because you can see what is happening and get a feel for the other bidders. You can watch the pace of the auction and, yes, eyeball your competition. But if auctions make you uncomfortable, there is nothing wrong with having someone you trust assist you, provided any authority requirements are dealt with beforehand.

8. Make sure everyone who needs to sign is available
Winning the auction is only part of the process. The contract then needs to be signed, and in some transactions personal guarantees or other documents may also require execution.

If your company, trust or purchasing structure requires more than one director, trustee or other signatory, make sure those people know the auction is happening and will be available.

At CBRE auctions, signing can be completed electronically, so a person does not necessarily need to be in the room. But they do need to be contactable and ready to sign. The last thing you want is to discover that a required signatory is on a flight or cannot access their email.

9. Recheck the property facts that underpin your price
Do one final review of the investment itself. Confirm the passing rent, lease commencement and expiry, options, rent reviews, outgoings, guarantees and security. Recheck the tenant and what you know about the strength of the covenant.

Look again at the title, building information and any due diligence reports. Revisit comparable sales and the other properties currently available. At your maximum price, what yield are you accepting? Does that still make sense compared with the alternatives?

You are not trying to redo your due diligence. You are making sure the key facts that formed your price have not become blurred by auction excitement.

10. Write down your number and stick to it
Your maximum price should be the point at which the investment still works for you. If somebody else keeps bidding, that does not mean your analysis was wrong. They may have cheaper capital, a different return requirement, a strategic reason to buy, an owner-occupier use or simply a different view of the property.

A disciplined bidder can lose an auction and still have made the right investment decision. The goal is not to buy at any price. The goal is to buy the right property at a price you understand and can support.

The 10-minute night-before auction checklist

• I have read the contract and my lawyer or conveyancer has reviewed it.
• I know exactly which entity is buying and the legal purchaser name is correct.
• I know my finance position and absolute maximum bid.
• My deposit money is immediately accessible.
• Any 5% deposit, settlement change or other non-standard term has been approved in writing.I am registered to bid and know whether I am bidding in person, online or by phone.
• Everyone who needs to sign the contract, guarantee or related documents is available.
• I have rechecked the lease, tenant, rent, title, outgoings and key due diligence.
• I have reviewed comparable sales and current competing properties.
• I know my second and third choices if this property goes beyond my limit.

 

Frequently asked questions

Can I bid subject to finance?

No.

Commercial properties sold at auction are offered on the stated contract terms, and auction contracts are intended to be unconditional. If you need a finance condition or any other change, it needs to be addressed before you bid and accepted by the vendor.

What if I only want to pay a 5% deposit?

Ask before auction day and get the variation approved in writing. If the contract requires 10%, do not assume the deposit can be changed after the auction.

Is it better to bid in person?

Not necessarily. In-person, phone and online bidding can all work. The best method is the one that lets you understand the process, hear the bids clearly and stick to your limit.

What if I miss out on the property I wanted?

That is why it helps to know your alternatives before the auction. Missing a property because it exceeded your limit is not necessarily a bad result. Paying more than the investment is worth to you can be.

The takeaway
The best auction preparation is boring preparation. Have the entity ready. Have the deposit ready. Have the contract reviewed. Know your limit. Get any changes approved before the auction. Make sure the right people are ready to sign.

Then, when the auction starts, you can focus on the only question that matters: is this property still worth buying at the price being asked?

Commercial property does not need to feel too hard. Follow the series and let’s demystify it together.