Maximizing value via auction: An efficient disposition strategy for banks with expanding REOs

All types of real estate owners, including private, institutional, governmental and corporate owners, successfully use the real estate auction to achieve their disposition objectives.   The real estate auction is an accelerated and structured program whereby the seller alone sets terms of sale, including those of the actual purchase and sale agreement. The seller's property is sold and subsequently closed upon as-is and on a non-contingent basis on dates that are designated unilaterally by the seller. Market conditions triggering substantial REO growth In this transitional national real estate market, auctions continue to be a particularly effective disposition vehicle for the many lenders seeking to maximize the value of their expanding portfolios of foreclosed-upon properties. The chief factors that have served as catalysts for the growth of REOs include: (a) The changes in the sub-prime market and ongoing credit crisis; (b) The pending expirations of the fixed periods on a plethora of three and five-year adjustable rate mortgages, which provide for lower, fixed payments for borrowers during the first few years of loan repayment periods; (c) The nation's housing situation; and (d) The high inventory of new residential construction and conversions (including condominiums, single-family homes and townhouses), which developers simply cannot move in line with their pro formas. Lenders on various asset classes have already begun to amass much larger portfolios of real estate on their books than they would like. Auction focuses market's attention on the subject property Lenders proceeding with the auction strategy will benefit from numerous advantages with which conventional methods of sale simply cannot compete. While the deadline inherent in the auction process creates a sense of urgency and forces buyers to act, the inevitable corollary is an advantage that is perhaps even more impressive, the auction focuses the market's attention on the subject property and freezes activity with respect to competitive product available in the marketplace at the same time. Assume, for example, the upcoming auction of a $25 million development site; prospective bidders simply will not make offers on similar properties until they do their due diligence and bid at the upcoming auction for the subject property.  Another major advantage is the minimization of carry costs associated with prolonged conventional marketing programs, which is particularly important for lenders seeking timely exits. Auction establishes property value without setting a ceiling on price Furthermore, the competitive bidding process will not only yield the highest price for the seller, it may actually cause the property to trade for a premium. Indeed, the auction process will establish a value for the subject property without ever setting a ceiling on price. This works especially well for properties that are difficult to value. In conventional programs, it is unlikely that property will trade above the asking price, which is usually the starting point. Conversely, in an auction, bidding begins below market value and stops at the point when no one is willing to pay more. Once again, that point may be higher than the asking price the seller would have set in a conventional sales program. Portfolio auction yields retail prices on timeline normally associated with bulk sale Finally, and perhaps most importantly for a lender wishing to execute a portfolio sale, is the fact that bulk sales ordinarily yield a discount for the seller. A properly conceived auction marketing campaign will provide for custom-tailored, individualized marketing and sales programs for each asset within a given portfolio (including REO portfolios). Though the timing of the marketing programs and auctions for the individual components of the portfolio will likely coincide, each of the properties should be treated individually to maximize value. Moreover, each property must be offered individually (versus in bulk packages); this will more likely produce higher/retail pricing for the seller. The net result to the seller is the execution of a portfolio sale with prices commonly associated with a retail sale, achieved on a timeline more often associated with a bulk sale—the best of both worlds. The auction provides extremely attractive value-added options to lenders who are already dealing with properties they do not wish to own. The ability to market, sell and close upon entire portfolios in structured sales, where lenders can control the timing and terms of the process, creates an ideal yet practical approach for banks seeking to maximize value of their REO portfolios. Misha Haghani, Esq., is a director at Sheldon Good & Co., Real Estate Auctions Northeast LLC, New York, N.Y.