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The Art of the Auction: Turning Losses into Liquidity

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By Walt Zelwak

RISMedia, June 1 2011—The word “auction” is derived from the Latin augeo which means “I increase” or “I augment.” Auctions have a long history, having been recorded as early as 500 B.C. There were many types of auctions held during the Roman Empire. One of the most significant historical auctions occurred in the year 193 A.D. when the entire Roman Empire was put on the auction block by the Praetorian Guard who offered the empire to the highest bidder. In some parts of England during the seventeenth and eighteenth centuries auction by candle was used for the sale of goods and leaseholds. This auction began by lighting a candle after which bids were offered in ascending order until the candle spluttered out. The high bid at the time the candle extinguished itself won the auction. The oldest auction house in the world is Stockholm Auction House, established in Sweden in 1674.

What is going on today?
The National Association of REALTORS® recently reported that distressed homes (typically REOs and short sales) accounted for 40% of the existing homes sold in March 2011. A new report released by Lender Processing Services on May 3rd, 2011 shows that foreclosure inventory as of the end of March 2011 was 2.2 million loans—a new all-time high. On May 4th, 2011, the FDIC provided detailed information in their “Special Foreclosure Edition” regarding Foreclosure/REO for all companies that they oversee. Banks and mortgage companies/servicers are experiencing foreclosure/REO volume spikes that are at all-time highs. Auctions are being done by the majority of both large and small banks and mortgage companies. Auctions are a valuable loss mitigation tool for collateral management staff as they help reduce inventory and minimize losses on select assets. The fact that auctions substantially reduce the number of units in inventory helps markets move to a more balanced environment.

Prior to any kind of action, the owners of these distressed homes must first establish worth of their asset. The real estate community is sometimes challenged to obtain the level of information and reports that would support valuation and sale analysis of distressed homes. Auction companies should be able to provide detailed feasibility studies that contain multiple metrics that support asset valuation and assumptions regarding the future performance of the real estate market near the subject property. A realistic schedule and timetable of anticipated cash flows from the asset should be established based upon realistic future market scenarios/assumptions. An auction is a great way to ensure that the cash flows can be net present value factored to a correct date in order to establish an accurate value. The Internet and modern technology has made a positive impact on auctions. Some auction company websites generate hundreds of thousands of page views per month from multiple countries. Interested bidder’s activity is closely monitored and is available to sellers 24/7.

Why sell via the auction method?
The auction method accelerates the sale of real estate assets. Auctions generate global consumer/investor interest via the World Wide Web. Non-contingent contracts and quick settlements are required of all buyers of auctioned properties. The seller sets the terms and conditions of the auction sale and the date and time of the sale and closing. Auctions do away with multiple showings and often stressful pricing negotiations with buyers. The bidding process creates competition that increases prices. The marketing strategy targets buyers matched to specific properties and bidders come prepared to buy. The auction bidding creates competition that increases sale price.

Why buy via the auction method?
The potential buyers obtain detailed information on each property from a due diligence package. The buyer knows the seller is seriously committed to sell. Auctions avoid extended negotiation which saves time. In multi-property auctions buyers can view many properties in the same place at the same time. Buyers determine the purchase price. Buyers know they are competing fairly and on the same terms as all other buyers.

Auctions are offered with or without a reserve. A reserve is a minimum number/price at which the property will transfer into new ownership. Auction laws vary by state with differing terms, definitions and rules and regulations can be different, so check with your attorney, REALTOR® or auctioneer. If you are looking for an auction firm consider first those with membership in the National Auctioneers Association and perhaps your state auctioneers association (www.auctioneers.org).

The auction method is a concept that dates to antiquity for a reason—It works!

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