Auctioning All Types of REO Properties
With REO numbers running rampant, alternative marketing strategies are becoming a must for lenders and servicers. Auctions are being described as one of the best alternative disposition methods in the industry.
More people are embracing the auction method, including real estate brokers and agents, title companies, mortgage brokers, and mortgage companies.
Some buyers fly across the country to compete with local bidders on properties. And at a lot of these auctions, there is a home to fit any price range whether it's for first time buyers looking for affordable housing or for investors who want to make a profit. However, a higher percentage of buyers these days are walking away from closings due to delays and mortgage problems and not being able to receive financing. Some markets are seeing a 25%-30% failure rate regarding properties that hit the market, become under contract but don't get sold. The No.1 reason is because the financing fell through.
Michael Harris, vice president of operations, First American REO Servicing, says his company works with national online auction firms while simultaneously working with the local market MLS. This increases the buyer pool, something asset managers need to see these days, according to Mr. Harris.
"There is greater competition for the purchase of the homes. It shortens the marketing times," he said.
There are different programs and opportunities for all through indirect auction buys, sealed bid and studio auctions, just to name a few.
Auctions companies such as Williams and Williams, RealtyBid.com, and Hudson and Marshall are making their programs even better known by educating those who work within the REO community. The truth is, according to the companies, auctions provide the least amount of friction and the least amount of fear for buyers.
Many economists believe the persistent glut of houses on the market will likely drop prices by more than 7% this year, making it an irresistible buyers' market. In fact more buyers are purchasing foreclosed or "bank owned" properties at auctions because they can find even better discounts on homes.
Each property is not treated as a commodity. The auction model is retail driven. Williams and Williams conducts auctions every 30 days. People can bid by cell phone, online or through on-the-lawn auctions.
If servicers re-list in the traditional marketplace, they can average out tremendous losses. To follow the traditional route of hiring a real estate agent, setting a speculative price, president and CEO Dean Williams has said 1% of the homes are sold at a price they are listed for.
Mr. Williams believes auctioning provides an opportunity to deliver full-market value. Through his experience over the years, he has learned best practices cost properties 30% to get liquidated. "I think it's too much - 30% or 50%. The U.S. housing market is fundamentally overvalued. That is huge. Why is that a surprise? Everyone has been incurring on average, 30%-50% to get liquid. Might that have always been the signal that value speculated and being paid, was at a 50% gap?"
RealtyBid.com, which usually receives properties from two sources - lenders and outsourcers - now takes properties from real estate agents and brokers. Mike Keracher, executive vice president, sales and marketing. In this technology-driven environment, the EBay-type auctions are attracting more and more first time homebuyers. During the company's first two years auctioning REO properties, 90% of buyers were investors. Now that number is around 65%.
Recently, Hudson and Marshall, which conducts ballroom style auctions, has sold and closed over 40,000 homes throughout the country. The auction firm markets and advertises properties for specific geographic regions. Sixty to 65% of the properties are bought by investors. Some markets are seeing declining values and large amounts of REO inventory. "The auction method is becoming more acceptable," said Annette Hamilton. "The cost savings though auctioning is important to note, and through auctioning sellers can see liquidity in 60 days vs. 120 days or more."
Hudson and Marshall sold 91% of properties at auction over the last five years. "Michigan has six times the fallout and borrowers not closing," she said.
Deborah Holm, vice president of national default sales and product specialist for First American REO Servicing in Denver, Colo., works with all of these auction companies. She finds out who is working in a specific location and pulls a list of properties in the specific state. Ms. Holm then studies the track offer history on the property. If there were several offers, why wasn't it accepted? If there were no offers, she recommends that the property be put in auction. If the property is listed at a low price range like in Detroit for more than 120 days, it should be given to auction as an alternative disposition method.
Asset managers use auctions to get more eyes on the asset. With six houses located on the same street, auctioning focuses attention on a specific property. It forces a decision. Multiple offers can come from people simply driving by the home who becoming interested in the bidding event. The home doesn't just sit there for 90 days with a for-sale sign in the front yard.
"When the market is slow, all of a sudden the seller is control. People think this is a bargain -- an opportunity to get a discounted home," she said.
RealtyBid.com sends out an email blast to those who have request to see notification about upcoming auctions. The company concentrates on a particular state each month. Most recently, properties have been auctioned in Georgia, Texas, Colorado, Florida, and Southern California.
Many of the auction firms use the Internet, television, street signs, radio and newspaper to advertise auctions in different locations. Marketing does cost time and money but it is worth it. Ads are also integrated through the online world.
"You have to get a lot of people to ensure a high bid," Mr. Keracher said.
Cary Sternberg, vice president of REO, home loan servicing, IndyMac Bank, says the most efficient liquidation strategy is to "not let the property get into REO." By the time he receives the property the focus is to liquidate that single asset for the highest dollar in the shortest amount of time.
Some servicers put half of their properties in REO retail sales and the other half are tried in auctions. "Five years ago, I would not consider using an auctioning marketing plan. I have seen the light," said Mr. Sternbeg.
"In certain areas of the country, I would definitely use auctioning. You have to identify the true end user and who wants the property. We do not want the property sitting vacant for long periods of time with three other REO properties on the same street. We need to liquidate these assets and get on with lending. We're not in the business of selling real estate."