Commercial Property Auctions in Australia - 5 Steps to Prepare for Auction Day

Acumen Finance presents 5 critical steps to prepare yourself for commercial property auctions in Australia.

Nathan Daly
October 15, 2020

Commercial Property Auctions in Australia - 5 Steps to Prepare for Auction Day

The crowd settles into their seats. Everyone watches in anticipation as the auctioneer advances toward the podium. Tensions mount and cumulative energy fills the room. Throwing out an opening bid, the auctioneer turns the bidding to the floor with a wicked-fast-paced chant intended to create a sense of urgency that whispers to you: “Bid now or lose out.” Unarguably, this is not the time to be asking yourself: “What to do?

In fact, at this point, you should be well-rehearsed and fully prepared with homework done, a clear goal in mind, armed with the knowledge that you are ready and know how to make it happen. And with this post, Acumen Financeis going to tell you just how to prepare for that commercial investment property auction.

Step 1: Know your Asset Type

Long before auction day, you need to do some basic homework. First and foremost, you must identify what it is that you want. Commercial investment property varies vastly. Are you interested in industrial or retail space? Do you want to open a service station, an aged care facility, an office building or multi-family housing? Perhaps you want to start small, and a strata investment (separate lot owners within a shared common area) is more in tune with your current ambitions.

Each of these commercial property types is a different asset class, and lenders view them differently. They will use the asset class to determine the investment risk, thereby influencing interest rates and loan-to-value-ratios, unlike the residential market where these are pretty standard.

When the time comes to find a lender, you will want to understand how the lender views the asset type you wish to fund. A good financial partner or broker can be worth his weight in gold as you determine the pros and cons of each asset type.

Step 2: Zero in on the Prospect

Once you have determined what you’re looking for, you’ll want to zero in on an investment. There are several online sources which provide listings of commercial investment properties. Domain’s Commercial View site allows you to search through each of the six states, plus the Northern Territory and Australian Capital Territory (ACT). You can filter the results by the asset class, as well as size, and postal code. This site also has sales results from past auctions making it a valuable source for information surely to help your research efforts. Burgess Rawson and RealCommercialoffer similar datastores of commercial property up for auction.

But perhaps the best source for locating the investment opportunity that’s right for you is through a working relationship with a trusted, experienced broker, as they often hear the inside whisperings of the best deals before they ever hit the market.

Step 3: Due Diligence

In our earlier post, Auctions in Australia, we talked about some basic due diligence you should do to help you prepare: Understand the region and its demographics; determine if there are any liens or back taxes owed on the property; and perform building and pest inspections to rule out structural problems, or determine whether there are potential health risks associated with the building, such as asbestos that will need to be removed. These are general steps that should be undertaken for any property purchase. But, as commercial property classes vary widely, so too does the list of prudent due diligence tasks.

For example, if you’re venturing into the retail market, you’ll need to know the effects of GST (Goods and Services Tax) as they can result in tax liabilities. If it is a going concern, you won’t be responsible for paying GST on top of the purchase price. However, if it is vacant when you purchase it, you will be expected to pay GST on top of the purchase price and before the settlement of the deal. OK, you may be able to claim back some of that depending on your tax structure, but be sure the structure is in place to begin with as this portion of the payment cannot be funded by banks. Of course, a qualified broker will be able to answer this and other questions specific to your intended asset type.

Step 4: Find a Broker

When dealing with commercial mortgage lending, many banks do not work directly with the average buyer because the process is substantially more complex. Instead, they prefer to work through established channels of brokers. Therefore, finding a reputable broker with the connections and resources for your property asset type can make all the difference between a slick and clean closure and missing out on that opportunity.

A good broker will know what eligibility requirements each of the major lending institutions abide by, and they can assess your ability to meet them. Through experience and expertise, the broker will provide market research and a list of all the necessary documents you’ll need for each of the competing lenders’ pre-approval process.

Some brokers, like Acumen Finance, will take the service a step further with other value-added resources, such as P2P lending from private lender pools of high-worth individuals and companies. With the freedom that comes through private lending, they will entertain low-doc or self-cert loans, and they can set their own terms, payment schedules, and LVR.  

The ideal broker knows the region and demographics; they understand zoning regulations and are often “in the know” when the local council is considering a change. They have the knowledge and expertise to help you account for all the possible contingencies across the array of asset types. And, as we mentioned earlier, the commercial mortgage industry is a “community” - a good broker is likely to hear of an offering before it hits the mainstream media. It’s like hiring your own inside-man for the job.

Step 5: Get Pre-Approved for a Loan

Some use these terms interchangeably, but they are not - so we start with a quick definition.

A pre-qualification letter is granted to the borrower based solely upon information the borrower provides and is not property specific. These are not guarantees of a forthcoming loan, merely a statement that says if all the information you have provided is, in fact, true and complete, you should be able to get a loan for a certain amount. While this is very helpful while shopping, be cautioned that a pre-qualifying letter is not the same as a pre-approved letter.

A pre-approved letter is usually property-specific as the result of completing a mortgage application. To get pre-approved, you’ll need to provide the lender all the requested documentation for them to perform an extensive check on your financial background and credit history. The pre-approved letter indicates that the lender intends to finance a loan upon request. This is very important to note the difference, because at auction if you’re the highest bid at the fall of the hammer, you are expected to exchange contracts and show the money - about 10% of the sales price.

The pre-approval process is not insignificant, by any means. There are many things to consider: property type, buyer background(s), lender requirements and eligibility top the list. Therefore, check back with us for an upcoming instalment wherein we’ll dive deeper into the pre-approval process with some valuable hints and tips to help you secure the loan and make your commercial investment dreams a reality. If you prefer, you can speak directly with one of Acumen’s experts to start the pre-approval process today.

The End Game

Here, we present the rules for all auctions, countrywide. In a future post, we will provide more specifics to the regional auction laws.

  1. To bid on a property, you must first register with the vendor’s agent, aka, the auctioneer. Once registered, you will receive a Bidder Number -  a unique number to help the auctioneer identify bids.

  1. At the time of registration, you should get a copy of the Buyer’s Guide which will include information on how to register, privacy rights and auction conditions.

  1. Thirty-minutes before the auction begins, the agent is legally required to distribute any property documentation, such as written guarantees to the property condition or an “offering memorandum.”

  1. In addition to announcing any rules specific to the auction at hand, such as advancement amounts (predetermined increase amounts), the auctioneer should also disclose any state and federal laws that apply to property auctions.

Once these formalities are complete, the auctioneer will ask for an opening bid, and the excitement begins. After following the steps above, you can rest assured: You’ve got this!