The Auction Process: Are You Getting It Right?

In their quest to safely clear the hurdle of procuring the best price reasonably obtainable for the mortgaged property, Banks and their Receivers alike often find themselves at the precipice of the mysterious auction process. Very often, selling the mortgaged property by public auction is advised to allay the fear of, and combat, the possible challenge that the mortgaged property was not adequately exposed to the market, and so the sale was at an undervalue. The Bank and its Receiver must satisfy themselves that the sale by public auction was carried out by a process, which stands up to the scrutiny of a peering mortgagor or that of other creditors. As such, the process, by itself, must demonstrate adherence to their duty to obtain the best price.

Therefore, once it is agreed that the mortgaged property will be sold by public auction, what happens next?

STEP 1: Setting the Auction down

Setting the auction down is more than deciding on a date and placing an attractive ad in the newspaper. Before a decision is made on the date of the auction, expert advice should be sought on the intended audience and market for sale, the best method of advertisement to reach that market, and the best duration for such advertisement to ensure full market awareness. This advice will determine which jurisdiction the advertisements will be placed in, what form the ads should take (newspaper, email blasts etc.) and how many times the ads need to be published. Based on this information, the date should then be set, bearing in mind that prospective bidders will need to arrange their finances for a successful bid.

Effective advertisements are not only clearly visible but also provide complete information on the mortgaged property, such as size, location, special town planning permits and current use. It would be equally helpful to alert bidders very early that the sale will be subject to a reserve price, if applicable, and other sale conditions.

STEP 2: Communicate the Conditions and Particulars of Sale

What should your bidders know between seeing an ad for your auction and bidding at that auction? The answer: everything (except your reserve price, if you have one and intend to keep it secret). The auction is a means to an end, which is (hopefully) a successful sale of the mortgaged property. To this end, full details of the property, including rights enjoyed, covenants imposed, town planning documents, a surveyor’s plans and any other relevant matter not already included in the advertisement should be provided to prospective bidders.

Where the property is sold ‘as is’, that is, in its present physical state and condition, this should be made expressly clear to bidders. Bidders should also be invited to inspect the property prior to making a bid.

It is also advisable that bidders be alerted to the fact that by making a bid, they warrant that they have obtained independent legal advice, and if successful in their bid, they will be bound to complete the sale on the terms and conditions set out.

STEP 3: Determine the Reserve Price

The advertisement and ensuing conditions and particulars of sale, which are provided to prospective bidders, should state clearly whether or not the sale is subject to a reserve price. The reserve price is described as the price below which the auctioneer cannot sell without the express approval of the vendor. Without a reserve price, a vendor could find itself bound to sell to the highest bidder, regardless of the level of the bid. Expert advice is recommended to determine the reserve price, and current valuations and market conditions should be considered.

STEP 4: Confirm Financial Integrity

A bidding process is not successful until and unless you know that your potential bidder has the means to complete the sale. Potential bidders should be requested to provide confirmation of their financial integrity by way of reference from a reputable banker. It is not unusual to request a deposit by way of a certified banker’s draft prior to bidding as confirmation of their commitment to the process.

STEP 5: Sell the Mortgaged Property

Once auction day arrives, and your auctioneer is greeted by your fully informed and committed bidders, the only thing left to do is sell.

Good luck!