Publications

- May 1, 2022: Vol. 9, Number 5

Taking real estate auctions beyond the courthouse steps

by Mike Consol

The modern auction block is the stuff of headlines. Think Picasso’s and van Gogh’s selling for millions. Ditto for McLarens and other classic or high-performance automobiles, as well as jewelry, coins, Michael Jordan basketball shoes. How about this one: The revolver used to kill Billy the Kid changing hands for $6 million at Bonhams.

And, yes, even real estate, and not only foreclosure sales on the county courthouse steps. Companies such as Auction.com, Concierge Auctions, Hubzu, and Williams Worldwide Auctions, deal with billions of dollars in real estate sales covering various property types, and even property portfolios, rather than strictly individual residential properties.

The auction block itself isn’t even necessary these days, as auctions have moved to the internet, boosting their accessibility to bidders worldwide (though hybrid or simulcast auctions — a combination live and online auction — have become the norm). The pandemic proved the final catalyst in pushing auctions to the internet and bringing more bidders per auction lot to the process.

And the real estate auction business is not without its marquee names, including Fortune 500 companies that regularly use the bidding process to sell surplus assets, as well as to source new real estate investment opportunities.

The advantages of real estate auctions can be many, says Jason Allnutt, CEO of Auction.com. Chief among them: Auctions are inherently more transparent for buying and selling real estate, and every buyer is guaranteed equal and fair access, often producing better outcomes for both seller and buyer. That transparency allows sellers to pinpoint the true market-clearing price of a property, and helps ensure they are getting the highest and best offer for the property.

“A properly executed auction creates a fair and trusted experience for buyers by levelling the playing field,” says Allnutt. “In an auction, it’s 100 percent about price, not who you know or your real estate sophistication. A first-time auction buyer is put on equal footing to compete against the biggest and most sophisticated investors.”

SPEED AND FAIRNESS

Auctions can benefit both buyers and sellers: Sellers have access to a speedy liquidation of assets, while buyers can purchase and close in 30 days.

Due diligence is conducted before the sale, not after, says Steve Stallard, CEO of Williams Worldwide Auctions, so when sellers register for the auction, they are agreeing to all the terms and conditions of sale, meaning after the winning bidder is determined, there is no additional due diligence period that ties up the property and delays completion of the transaction.

Allnutt points out that buyers are given the opportunity to purchase distressed homes, repairing them to quickly put them back into the retail housing market and, hopefully, making a reasonable profit along the way. Sellers have received an average sales price 23 percent above the reserve price (their target price), says Allnutt, adding that 45 percent of foreclosure auction sales produced surplus funds during 2021, with an average surplus of more than $43,000 — reducing or sometimes eliminating some of the negative consequences of a foreclosure on the homeowner.

Score one for distressed homeowners.

The community benefits as well, reasons Allnutt, as renovated properties resold through auctions in 2020 sold for 102 percent of after-repair market value, which is the estimated value of a property after it has been renovated and improved.

“Distressed real estate can have various negative impacts on local communities, rapidly moving these houses back into homes significantly reduces that,” he says. “These renovated resales become comparable sales [comps] for other homes in the neighborhood, helping to lift those surrounding home values. This value lift benefits surrounding homeowners in the form of increased home equity wealth, and it benefits overall community quality in the form of increased property taxes to fund schools and other neighborhood amenities.”

Stallard asserts that all types of properties lend themselves to auctions: residential; luxury homes; farms and ranches; raw land; as well as commercial assets, such as industrial, office, retail, hotels and wineries. He indicates this is true, in part, because auctions can address a host of situations.

“If a property is vacant and non-earning, or surplus, or the seller wants to make a strategic decision to have a time-definite real estate transaction, an auction can be a great tool,” says Stallard.

Travis Britsch, general manager of Hubzu, concurs: “The time-limited nature of auctions really pushes buyers to get off the fence and engage before the opportunity has passed. This is true for starter homes in rough shape, all the way to trendy move-in-ready mansions.”

Though most properties (distressed and non-distressed) are still sold one at a time, “bulk auctions” have become common, Britsch says, with portfolios ranging from five to 100, or more, properties offered. On the other side of those transactions are large investors, often looking exclusively for bulk sales as a means to quickly acquire many assets at bulk pricing.

Stallard adds, “Though a single property will sometimes be put up for auction, large portfolios of hundreds of properties are sometimes taken to bid, with clients sitting in boardrooms viewing the auction process over a three- to four-day period.”

Traditional auctions have accounted for a very low percentage of the total number of real estate transactions — 1 percent to 2 percent. Over the past 10 years, however, the use of enhanced technology has created a surge in online and hybrid real estate auctions, as buyers and sellers find that auctions are more efficient than selling real estate by listing with real estate agents or brokers, and waiting for the best offers to trickle in. Banks, mortgage servicers and some government programs have expanded the use of real estate auctions to help reduce the post-foreclosure holding period.

The buyer’s advantages at auction houses are many, says Stallard, including access to investment-grade properties, reduced negotiating and purchase periods, and the potential to acquire properties that have special circumstances.

LIVE VERSUS ONLINE

Live auctions in hotel ballrooms are what people are accustomed to seeing in movies and TV programs for cars, artwork, and other high-end goods and collectibles, and they are portrayed as exciting, high-energy events, with ego-driven bidding wars between nemeses. Online auctions, though lacking the direct interaction between bidder and auctioneer, offer bidders the convenience of participating from anywhere in the world, notes Stallard.

“Can’t make the auction? No problem, put in your proxy bid, and the system will bid on your behalf,” remarks Stallard.

Indeed, many auctions are solely conducted online, with no live auctioneer calling for bids real time, says Britsch.

Why? Stallard points to the added expense of live auctions, which is why they are often reserved for high-value properties — though he also notes that all modern auctions have an online component of some kind.

Adds Britsch: “There are a substantial number of simulcast auctions, where there is a live auctioneer, often with live bidders, while simultaneously the audio/video are broadcast online to bidders participating over the internet. Very rarely, aside from foreclosure auctions that typically take place at the county courthouse steps, are real estate auctions only limited to live onsite bidding.”

Real estate auctions also allow investors to search different auction sites and find buying opportunities that aren’t found on listing services. An example, offered by Stallard, is an off-market, cash-only, tenant-occupied property, giving an investor a shot at owning a property with a tenant already in place and under lease.

In most cases, investors can inspect the property before the auction and can do whatever due diligence necessary to feel comfortable about their bid, says Britsch, and they don’t have to waste time with sellers who aren’t motivated, or haggle over bids and counterbids.

PANDEMIC SIDE EFFECTS

The industry was unsure what effects might be wrought by COVID-19, but what transpired was a huge uptick in real estate demand, as consumers rushed to escape crowded cities. What’s more, changes in supply-chain logistics caused a reshuffling of warehouse locations and distribution spaces.

“We think we’ll see a continuation of that in the immediate future, both in the private sector and in the mortgage-servicing pipelines,” predicts Stallard. “Although we see residential real estate leading the way for years to come, due to the pandemic, commercial properties will undergo a revolution. I see more commercial converting to residential to meet housing demand. Obsolete real estate assets, like huge office buildings and empty retail spaces, are great candidates for auctions and drawing in visionary buyers with ideas for repurposing or revitalizing.”

Real estate auctions have continued to gain popularity and volume ever since the early 2000s, says Britsch, as an increasing number of buyers look to auctions as a way to source new properties.

“Auctions, by their nature, are very straightforward and simple events, which is part of the appeal,” he says.

GOING FORWARD

And what about the continued evolution of real estate auctions?

“As we’ve seen in other countries around the world,” says Stallard, “auctions will continue to gain favor in the industry and will be used alongside traditional listings to solve problems relative to transaction delays and carrying costs. Like most other businesses, the marketing and transaction protocols will continue to move to an online platform.”

Allnutt adds, “The power of technology ensures transparency and an even playing field.”

Auction companies will continue to facilitate and amplify the use of technology through many different methods, including making more-accessible websites, mobile sites and mobile apps, says Britsch. They will try to optimize the balance of developing an easy-to-use platform, which includes registration, bidding and purchasing, while creating a secure marketplace that ensures only motivated serious buyers — those intent on bidding and closing property deals — are participating.

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter (@mikeconsol) and LinkedIn (linkedIn.com/in/mikeconsol) to read his latest postings.

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