COVER STORY, FEBRUARY 2010

GOING ONCE, GOING TWICE, SOLD?
Real estate sellers pursue auctions, but banks not so sure.
Jon Ross

Auctions have historically been the last option for sellers looking to unload real estate. A healthy market flush with financing fostered other avenues that were more appealing to sellers, but in a slumping market, more property owners are turning to auctions as a first course of attack.

Auctions, according to Jeb Howell of Auction Management Corporation, are one of the best ways to get the market moving. He recently helped auction off a 61-unit multifamily property in Fayetteville, Arkansas, which had already been listed by a broker. The broker received a $250,000 offer on the development; the property ultimately sold at auction for $1.1 million.  

“What an auction does is it forces action,” Howell says. “We’ve seen that time and again, the best price the brokers can bring in right now on these assets is half or less of what we’re getting at auction. We’re creating competition, and we’re forcing people to have to play. Everybody wants to lowball, but they can only lowball one bid increment above what everybody else is willing to lowball.”

As an auctioneer, Howell deals primarily with banks. One problem he’s been facing recently is that banks are wary of trading assets when property values are down marketwide. There are still auctions to be held and buyers are in the market, especially for multifamily, but financial institutions are slow to act.

“The banks are still in the mode of pretend and extend or hold and hope rather than take the asset back. Once they take it back and they start to market it, and they have to sell it for today’s price, they can’t afford to take the hit,” Howell says. “The biggest surprise we’ve seen is that banks are so far underwater that people we thought would be just selling right and left right now are really, for the most part, not.”

To break the banks out of this financial funk, Howell says a major player like Fannie Mae or Freddie Mac needs to start selling. Buyers have established the asset prices in the current market, and firms need to unload assets in order to drive up that current value. This, of course, would mean sellers need to take a few hits to get the market back in order, and nobody really wants to do that. David Gilmore of Sperry Van Ness Accelerated Marketing paints auctions as a “controlled chaos” where owners don’t really want to sell, and buyers won’t bite unless they see real deals.

“Usually a seller — be it a bank, debtor, builder, etc. — is pulled kicking and screaming to an auction meeting,” Gilmore says. “Unless it is the last-gasp attempt to pull the situation out of the fire, they don’t want to do it.”

Gilmore and his co-worker John Johnson find auction clients using traditional marketing approaches, and some sellers in the current market are even apt to choose auctioning off property above brokerage. Auctioneers also get business from brokers who bring in real estate that has a hard time selling. “Very frequently, another broker will call us, either because his seller has asked him to find a good auctioneer or because he has a listing that is just not getting any attention or action,” Johnson says.

Asset values have declined to the point where some properties are worth less than the existing debt on the structure. In these cases, auctioneers work to get lenders and sellers to agree to an auction, even if the property sells for less than the loan amount. The alternative, of course, is foreclosure, which may deteriorate the property’s value even more. “If we can get the property sold at auction before it goes to foreclosure, the short-fall that the seller has to make up should be much less than if the lender forecloses and then sells the property later for less,” Johnson says. “While both the seller and lender may take a hit, we are usually able to lessen the hit.”

While the recession has pushed more sellers out of the woodwork, many of them are left searching for someone to buy their properties. More inventory, both traditional and distressed, is available, but there are fewer qualified buyers on the market. Sellers can always protect themselves from getting a raw deal by setting a high reserve price during the auction. But this also can lead to problems if buyers, who are skittish anyway, don’t want to produce enough cash.

“Bidders are shying away from real estate auctions unless they are confident that the seller really plans to sell to the high bidder,” Johnson says. “Many auctions have occurred recently that did not end up producing a closed sale because the seller’s reserve or minimum bid amount was too high.”

The auction business has been booming for Jeff Motley of Richmond, Virginia-based Motley’s Auction & Realty Group. His team is seeing a wide range of commercial property types come in from sellers, and buyers have been expressing interest in these assets. While multifamily assets are flooding the market around the Southeast, warehouse and office condominiums are especially hot.

“We are seeing almost a flight back to quality of people wanting to invest in real property,” Motley says, noting that some buyers may have become fed up with pursuing stocks. “They’re now seeing the value in real estate again and moving back into that market,” he says.

Motley’s business hit a lull a year and a half ago, when for 6 months, it was hard to auction off assets because sellers were afraid of the market. From one day to the next, nobody knew how the commercial real estate market was going to react; sellers were fearful of this volatility. It was also very difficult for buyers to obtain any sort of financing during this time. The market is still tough, but Motley has started trying to get clients into some of the new properties that are delivering in the region. By helping them trade non-performing assets, Motley can also help sellers obtain newer Class A properties at lower prices. But these sellers have to be ready to take a hit on property value.

“In this market, you’ve got a lot of people that are taking hits whether they sell it at auction or they list it and do a private treaty,” Motley says. “Most of the people have either been in a situation where they’ve listed it and had no activity or have come to the decision that we need to move this off our books and we need to move it off rapidly.”

Sellers look to unload assets in the most profitable manner, and in this new commercial landscape, Motley says, auctions have become a good way to sell something quickly and profitably. This trend can be seen in Motley’s business activity. “In the last 9 months, we’ve been as busy as we’ve ever been,” Motley says. “In terms of commercial property, we see our business being very busy for the next 2 to 3 years.”

The recession has changed the auction market’s DNA at a time when the industry has embraced technological advances that make it easier for buyers and sellers to connect. Increased marketing efforts amid declining property values have helped push auctions to the forefront of property owners’ minds and ensured that auctions will prosper in the coming year.

“It’s extremely complicated; the marketing is very aggressive,” Motley says of the current sophistication of the auction process. “It’s not standing in the back of a pickup truck selling a piece of real estate anymore.”

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