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Diliberto Real Estate Services, LLC Presents:

Guide To Real Estate Auctions Find a new way to Real Estate Opportunities

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Section I: Auction History and Fundamentals

Section II: Building Your Auction Vocabulary Section III: The Auction Buying Process

Section IV: Suggestions & Tips For Buying at Auction

Section V: Evaluating Buyer Criteria 2

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“Auctions are the trading floor of real estate — where the most motivated buyers meet the most movitvated sellers.”­ 

— Frank Diliberto

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Section I

Auctions: History & Fundamentals

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Section I addresses the history and fundamentals of real estate auctions, and introduces you to the auction process. The section will also examine the genesis of auctions from early history, to their use in troubled markets, and how the discipline is utilzed today, in all economies, good and bad.

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uctions are nothing new. Dating back to the 5th Century B.C., auctions have played a vital role in the evolution of commerce, and have been used to sell everything from paintings to multi-million dollar commercial buildings. While the real estate auction has only recently become common in the United States, its roots reach all the way back to ancient Rome. Perhaps the largest and most notorious auction in history was the sale of the Roman Empire in 193 AD, after the assassination of the Emperor Pertinax prompted the Praetorian Guard to proclaim that the entire empire was to be sold to the highest bidder in an auctionem, which is Latin for “a sale by increase of bids,” the definition of “auction” that we still recognize today. This was the first recorded auction of real estate, since buildings were being bid along with the jewels, livestock, and people they

housed. And what did the most famous empire in the history of the world go for? A mere 6,250 drachmas, or roughly 300 U.S. Dollars. Used worldwide on a semi-regular basis thereafter, the auctionem was eventually imported by England in the 13th century as the “publick outcry,” a term which was finally supplanted by the simpler term “auction” around the year 1680. However, British auctions of real estate did not occur until the mid 1700s and they did not enjoy the common currency until the latter half of the 19th century. Even then, though, the auction was used primarily to sell foreclosed or otherwise distressed properties--a fact which would hold true decades and hundreds of miles later on the American frontier. During the westward expansion of our own country, when pioneers were looking for a quick and easy way to dispose of homes and personal property that couldn’t

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be carried cross-country, they held auctions. But it wasn’t until the Great Depression of 1929, with its mass foreclosures, that real estate auctions began to head in a new direction. The events of the ‘20s and ‘30s forged a double-edged sword: real estate auctions were here to stay, but they would long assume the albatross of “depression mentality,” and even though auctions are used today to sell trophy properties for high stakes, the “distressed”mentality of auctions had been difficult to overcome in the industry. However, those who understand the process understand auctions are a “clearing house” of opportunity for both the sellers and bidders. The 1960s saw the first auction sales of non-distressed properties, most of which, however, were rural properties such as farms and land tracts with high carrying costs. In the ‘70s, auctions were used as part of work-out agreements between debtors and creditors. The high-roll-

Auctions are employed to sell everything from rare works of art to multi-million

dollar buildings.

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ing ‘80s used auctions to solve a variety of difficult disposition situations, but were called upon mostly to solve problems associated with high interest rates and the inability foreclosures for property owners to hold on to their real estate, auctions were also called upon to sell surplus “lender” real estate resulting from the spiraling of property values. In addition, throughout the Reagan Era, the prestige of auctions was bolstered by such governmental agencies as the Veterans Administration, VA, Housing and Urban Development, HUD, and Farmers’ Home Administration, that developed major auction marketing efforts to quickly sell substantial numbers of properties. In later years, even in some of the strongest economies in our nation’s history, auctions played a larger role in the sale of real estate than ever before. Auctions were used for the first time to sell large portfolios of non-distressed properties that include multimillion dollar estate homes, condominiums, homesites, townhomes, commercial and industrial properties, nonperforming and perfoming loans, and even specialty properties such as places of worship, theatres, gas stations, and municipal buildings. In past decades, annual U.S. auction sales more than tripled, according to national statistics. This was due in large part to the rise in property owned by lenders looking to get a quick sale of their assets while reducing 6

carrying and marketing costs. Another cause was the vast increase in the auction industry’s organization and professionalism. But perhaps the underlying reason for the recent success of auctions has more to do with increased public acceptance. Over the past few decades, buyers and sellers alike have surely come to realize that auctions are simply a very accurate gauge of true market value, whether a property is distressed or not. Sellers will achieve a timely sale, and buyers will get a bargain. Countries such as Australia and Scotland, where annual auctions sales comprise 50% to 70% of all real estate sales, have understood this principle for years, and their economies have reaped the benefits. Now, in the United States, real estate auctions are more accessible than ever before to a much wider public. Once upon a time, auction situations were more speculative, and opportunities were almost exclusively reserved for investors and real estate professionals who had “inside” information about which properties were being earmarked for auction. Little if any notice was given to the general marketplace prior to sale, making it virtually impossible for the buying public to discover such discount opportunities. Such insiders were expected to pay a substantial amount of cash within hours of buying a property at auction. These days, however,

the situation favors a vast majority of buyers, and there are countless opportunties out there for the discriminating buyer who takes the time to find out about them. It’s not difficult to understand auctions. By arming yourself with resources that alert you to auction properties you will notice that the market is filled with auction opportunities including everything from small condominiums to luxury hotels, and the recent proliferation of real estate auctions makes buying quality property at auction easier than ever. The real estate auction is not an aberration of a mainstream economic system; rather, the auction is the visible manifestation of a relatively invisible market economy, whereby stocks, bonds, mutual funds and the like are traded via competitive bidding every day. Today, in western democracies, virtually every type of commodity is traded– or “auctioned,” as it were–on some type of market. Today, highly sophisticated news services, as well as the growth of real estate auctions, makes it possible for anyone to be an “investor” in real estate whether buying your home or commercial asset. However, the cost of retrieving information on auction properties, outside of reading the newspapers, which includes only a fraction of available auction properties, can be very expensive or time consuming.

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Furthermore, since it is difficult to learn about many auction bound properties in a timely manner, buyers like yourself are usually too late to participate. Diliberto Real Estate Services offers several levels of advisory services to provide the information necessary to learn about and act on auction opportunities. These services range from consulation, to “property alerts� and representaton, whereby Diliberto Real Estate Services, LLC assists in evaluation and acquisition and attendence at the auction itself.

Real estate auctions now commonly sell all types of residential and commercial property.

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Section II

BUILDING YOUR AUCTION VOCABULARY

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Section II defines commonly used auction terms and addresses various auction offering strategies used in both residential and commercial real estate auctions.

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tatistically, the majority of auction attendees are not familiar with standard auction terminology. As a result, most bidders cannot properly qualify an auction, do not know which auctions can provide the best discounts and do not know the obligations associated with the auctions. Conversely, a buyer who is knowledgeable about commonly used auction terms can better qualify a real estate auction as a good bargain opportunity, can bid in a manner that maximizes their discount and can feel safe that they understand the general obligations associated with the auction they plan to attend. Of course, a buyer’s attorney should be consulted for review of all materials. Auction Types There are three basic types of auctions: The Open Out-Cry Auction describes an auction where there is a public and open bidding forum, allowing all bidders to hear or know where each bid is placed. The open outcry auction is the most commonly used offering. In

this type of auction everyone is usually bidding based on a pre-determined contract and usually no changes are allowed at the auction. Any questions or changes are usually allowed only prior to the auction, so a bidder in this arena must be certain they are prepared to sign the contract in its existing condition. The Sealed Bid Auction describes an auction whereby all bids are privately submitted, and no one knows the levels at which others have bid. Sealed bids are usually deadline dated, indicating the date and time by which all bids must be submitted. In many cases, bidders modify the purchase and sales agreements. However, it is recommended that the buyer discuss any anticipated changes with the seller prior to making the changes. Often, auctioneers and sellers evaluate the bids on a point-basis, whereby nonconforming offers, or offers with changes, lose points in the process. An Online Web-Based Auction describes an auction whereby bidders can bid online during a course of minutes, hours, or even days,

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in competition with other online bidders. In many cases, online auctions can co-exist with a live or sealed bid auction. Auction Marketing Methods There are three basic auction marketing methods used by sellers and auction companies: Single Asset Stand-Alone Auctions describes an auction for one property, offered by one seller. The Multiple-Property SingleSeller Auction describes an auction for many properties, which can be offered in bulk or individually, offered in many cases by one seller such as a bank or home builder. These auctions can include many similar properties such as 20 condominiums in the same community, or many dissimilar properties scattered throughout a region. The Multiple-Property Multiple-Seller Auction describes an auction for many properties, usually non-competing, scattered Auctions mean throughout a region or opportunity! area, offered individually to

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individual buyers, by many different sellers Auction marketing methods are based on the type of real estate to be sold, the feasibility of cost to bring the property to auction, the desired timing of the sale, and the seller type. OFFERING METHODS There are three different offering methods, or ways in which real estate is sold at auction: ABSOLUTE AUCTION Also known as Without Reserve Auctions, these auctions create the most credible auctions from a buyer’s point of view. The seller has obligations to sell the property to the highest bidder. Buyers can justify their time and efforts in preparing for the sale by doing the following:

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reaches the “minimum bid,” which is usually published. The finite terms allow a bidder to assist their interest early in the program. WITH RESERVE AUCTIONS attending open houses, meeting with their banker to qualify for the loan, preparing cashier’s funds to attend the auction and having their attorney review the auction contract. The high bidder usually signs the purchase and sale agreement at the end of auction, deposits their cashier’s funds, and then immediately receives an executed copy of the contract. MINIMUM BID AUCTION A minimum bid auction is one in which the seller gauranatees a sale if the price

Properties offered with reserve are auctioned in a similar fashion. However, the acceptance of the offer is subject to approval or confirmation of the seller. This strategy minimizes the seller’s risk by allowing the seller to reject the high bid price, usually within 48 hours of the auction. The high bidder, (in most cases) would still be obligated to sign the purchase and sales agreement, with an irrevocable caveat, which provides that the buyer agrees to allow the seller a period of time to consider the offer.

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While this type of auction does not guarantee the bidders that the property will be sold, it is a very typical format. In order to accommodate the high bidder for their efforts in the event their bid is rejected, many sellers will offer the rejected high bidder a “buy-back” fee. This fee varies based on the value of the

asset and can range from $500 to thousands of dollars. STALKING HORSE BIDDING Stalking horse bidding creates an auction whereby a bidder is selected to offer the first bid at some

committed level, and in many cases, the stalking horse bidder, in exchange for guaranteeing the bid, is guaranteed to buy the property at that price. This is disclosed to all bidders, and all bidders have an opportunity to place bids in excess of the stalking horse bid. In effect, a stalking horse can be viewed as a minimum bid. In some cases, a fee is offered to the stalking horse bidder, in the event another bidder out bits the stalking horse. While the stalking horse bidder will lose the property, they are provided with a “break-up” fee which compensates the stalking horse bidder for their position. Opportunities exist to become a stalking horse bidder, which offers a good opportunity to buy the asset or earn a fee in the event another bidder prevails.

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POOLED UNIT BIDDING Pooled unit bidding descirbes the process whereby the auction proceeds in “rounds of bidding” with each round ending with the winning bid awarded to the highest bidder. This winner of the bid has the right to choose any of the properties from the pool. This process continues until all properties are sold. However, the auctioneer usually has the right to adjust, add, or delete properties between each round of bidding. This does not mean the properties are being sold as a group. The auction then progresses in “rounds of bidding,” with each round ending with the winning bid awarded to the highest bidder. This winner of the bid has the right to choose any of the properties from the pool. This process continues until all properties are sold.

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Section III

Auction Buying Process

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Section III takes you through the process of buying real estate at auction. Whether you are buying your first home, your dream home, a vacation residence, or a commercial property for your business, this section is designed to help feel at ease with the entire process.

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ost auction companies prepare many types of marketing materials on each property, which you can obtain by calling the auction house. However, qualifying the property for the buyer’s purposes and their pricing goals is another matter. At DRES we can help you make decisions that meet your best interest. This will be done by helping you determine realistic goals and expectations within your resources so that we can find many options from which to choose. Specifically, the following information is recommended when considering an auction. Entity of Seller Sellers can be a developer, corporation, private owner, liquidating trust, municipality, financial institution, or government agency court ordered sale. Reason for Auction: in most cases the basic auction

documents will state that the seller is seeking to expedite the sales process. Ask questions, such as “why is an accelerated sale required?” Examples include: is the sale directed by a bank in lieu of foreclosure, is the seller a liquidating trust that must sell the property by a specific date, is the auction directed by a court of some nature, is a corporation seeking to sell surplus properties in a timely fashion, is the auction part of a bankruptcy, estate, or foreclosure proceeding, is the auction being used as part of a condemnation proceeding, is a developer using the auction simply to close-out the remaining homes in subdivision. Must certain prices be attained before a sale will be approved? For example, if you wished to spend $250,000 on this asset, but it cannot be released under 300,000, there’s no reason to bid. Auctioneer Requesting information

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on the auction company conducting the auction can help you determine the reputation of the company and therefore helps you evaluate: Seller financial standings and ability to close the transaction, and quality and condition of title policies. Condition of Property You must request information on the present condition of the property. Most auctions provide that you will accept the property in AS-IS condition, with all faults. In this case, you will not have an opportunity to inspect the property or supporting materials after the auction. Your winning bid at auction legally binds you as the Buyer. Condition of Title: Again, in most cases the properties offered at auction are being sold in AS-IS condition. This means you must examine the title insurance advertised. The seller is then obligated to accept the highest offer over the stated minimum bid, but is not obligated to accept prices under the minimum bid. Minimum bids offer comfort to the buyer because they are certain of buying the property if they are the highest bidder over a specified amount. Attorney Review It is recommended your attorney review all documentation.

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Section IV

Suggestions and Tips to Buying at Auction

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Sections I through III addressed the fundamental as well as the technical steps in the auction process. Section IV provides suggestions, examples, and tips on utilizing this knowledge to your benefit when buying property at auction.

Keeping track of upcoming auctions Diliberto Real Estate Services offers consultation and advisory services, which provide a client with services ranging from consultation to representation and property alerts. DRES representatives are glad to speak with you to discuss their full line of advisory services. Property Evaluation Diliberto Real Estate Services is well-versed in the development of pro formas to determine the potential of any asset. DRES also offers development of evaluations, which includes past, current, and anticipated asset performance and offers interpretations associated with investment upside and risk. These evaluations include a thorough understanding of the asset’s market position.

Acclerated Buying Services In today’s market, timing is everything; a “good” buying opportunity won’t last long. The better the deal, the faster it’s gone. Therefore, Diliberto Real Estate’s accelerated selling and buying strategies create a timeline for the buyer or seller to evaluate the buyer’s or seller’s situation, and to finalize a transaction in a few as six–eight weeks. Accelerated acquisitions can be very helpful in the event a good opportunity dictates a fast approach, or in situations involving exchanges or similar timesensitive transactions. Diliberto Real Estate Services can also assist with selection of DRES financially. Regardless of the situation, Diliberto’s unique and timely evaluation and tracking services provides its clients with a time-definite buying or selling plan.

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Making Your Offer The prospective buyer can make a preemptive offer, prior to the auction: That’s right, you don’t have to wait until auction day to make an offer. You can utilize the purchase and sales agreement provided by the seller in the bidder’s packet, or prepare your own contract to submit an offer prior to the auction. Remember however, that the seller has gone to great lengths to prepare a contract, and therefore you are likely to appeal to the seller by using the existing auction contract to present your pre-auction offer. Your attorney can make the necessary changes to better suit the contract for a preemptive offer. Making an offer prior to the auction can act as a good

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Exclusive Marketing Representative

Global Solutions & Strategies 13500 S. Circle Drive, Suite 203 Orland Park, Illinois 60462 Office: (708) 460-BIDS (2437) Fax: (708) 460-2438

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barometer of the seller’s expectations. Advice on counteroffers is another strategic service offered by Diliberto Real Estate Services, and each is evaluated on a case-by-case basis. At the Auction The auction provides a competitive bidding forum that allows you to place a bid in a live open out-cry, sealed bid, or on-line web-based auction platform. Sealed bid auctions provide a forum in which you submit your signed offer. In an open out-cry or online auction bidders have an opportunity to witness the value other bidders have

placed on the property. This can be very comforting to some bidders, because they can see how their opinion of value compares to that of other bidders. Remember, in an open outcry auction, you should plan to sign the existing purchase and sale contract in its “As-Is” condition. You should have, by this time, received this contract from the auction company, which is usually provided in the bidder’s packets. Diliberto Real Estate Services offeres guidance to understanding each venue and can work with a buyer’s lawyer to provide optimal opportunities.

After the Auction While many properties will be confirmed as sold at the auction, there are properties that might be sold with reserve, which allows the seller to consider the price for a period of time after the auction. In select cases, the auctioneer might allow bidders to make an offer after such an auction.

Example of an Auction Timeline

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Types of Auctions

Pooled Unit Bidding

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Section V

Evaluating Buyer Criteria

Section V: As part of our evaluation process, Diliberto Real Estate Services provides the attached qualification information: a represenative of DRES will be glad to discuss this form and work with you to assist in its completion.

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BUYER CRITERIA SHEET BUYER INFORMATION Name: Address: City:

State:

ZIP Code:

Day Phone:

Evening Phone: PROPERTY TYPE:

□ Residential □ Land □ Other

□ Commercial □ Industrial

□ Office □ Self Storage

Please Explain:

Time Frame of Acquisition: Is Buyer seeking to accomplish an exchange?: Price Perimeters: PLANNING AGENDA:

□ Growth

□ Retirement

□ Income

LOCATION PERIMETERS:

□ Alabama □ Colorado □ Idaho □ Louisiana □ Mississippi □ New Jersey □ Oklahoma □ Tennessee □ West Virginia

□ Alaska □ Connecticut □ Illinois □ Maine □ Missouri □ New Mexico □ Oregon □ Texas □ Wisconsin

□ Arizona □ Alaska □ Delaware □ Florida □ Indiana □ Iowa □ Maryland □ Massachusetts □ Montana □ Nebraska □ New York □ North Carolina □ Pennsylvania □ Rhode Island □ Utah □ Vermont □ Wyoming □ Other:

□ Arkansas □ California □ Georgia □ Hawaii □ Kansas □ Kentucky □Michigan □ Minnesota □ Nevada □ New Hampshire □ North Dakota □ Ohio □ South Carolina □ South Dakota □ Virginia □ Washington

Income Necessary:

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EXTENDED BID DEADLINE: APRIL 8

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708.460.2437

www.dilibertorealestate.com Illinois Broker #481.011299

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COMMERCIAL, DEVELOPMENT AND RESIDENTIAL PROPERTIES Many Properties to be Sold

ABSOLUTE, REGARDLESS OF PRICE! Chicago, Glen Ellyn & Lombard, Illinois

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On Chicago’s Grand Boulevard, Roosevelt Road

Sealed Bid Submittal Deadline: May 5

Prime Five-Plus Acre Chicago River Development Parcel

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igh quality brochuring, display advertising in major publications such as the Wall Street Journal and the Chicago Tribune, online advertising that targets a specific audience, product videos, mailing/telephone calling campaigns, and personal contact with prospective buyers are just of the few ways auctions serve sellers and reach a vast audience in a short marketing period.

In cooperation with

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Diliberto Real Estate Services, LLC 13500 S. Circle Drive Suite 203, Orland Park, IL 60462 708-460-BIDS (2437) • Fax: 708-460-BID8 (2438) www.dilibertorealestate.com 20

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Auction Guide