Auctions represent an efficient disposition strategy for lenders with expanding REO portfolios

Auctions represent efficient disposition strategy for lenders with expanding real-estate owned (REO) portfolios. The real estate auction is successfully employed by all types of real estate owners, including private, institutional, governmental and corporate owners, to achieve their disposition objectives. Essentially, the real estate auction consists of an accelerated and structured program, including a comprehensive marketing program that culminates in a sale of the asset(s). The seller sets the terms of sale, including those of the actual purchase and sale agreement as well as the timeline for closing, in advance, creating a level playing field for buyers to compete. Market conditions triggering substantial REO growth In this astonishing 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 continue to serve as catalysts for the growth of REOs include: (a) the sub-prime and credit crises, (b) the nation's housing slump in general, (c) 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, and (d) the increasingly high level of residential inventory (including condominiums, single-family-homes and townhouses) that developers simply cannot move in line with their pro formas. Lenders on various asset classes have already begun to amass much larger portfolios on their books than they anticipated. 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. This advantage is extremely important, particularly in a buyer's market like this one, characterized by high inventory (i.e., lots of choices for buyers) and a lack of a sustainable motivation to buy (due to financing difficulties, expectations of further market value declines, etc.). Auction establishes property value without setting a ceiling on price Not only will a competitive bidding process 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 unique or difficult to value. In conventional programs—particularly in a down market—it is extremely unlikely that an asset will trade above its asking price, which is usually the starting point for negotiations. 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 (or any seller) 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 portfolio. Though the timing of the marketing programs and auctions for the individual assets within the portfolio will coincide, each of the assets should be treated individually to maximize its value. Moreover, each property must be offered for sale individually (versus collectively in bulk packages), as this will more likely produce higher/retail pricing for the seller. Thus, in an auction, the net result to the seller is the execution of a portfolio sale for prices more commonly associated with an individualized/retail sale, achieved on a timeline more often associated with a bulk sale—the best of both worlds: higher prices on a faster timeline. These attractive competitive advantages inherent within the auction process help lenders and sellers seeking to sell portfolios of real estate efficiently. The ability to market, sell and close entire portfolios of property using structured sales, where lenders can control the timing and terms of the process, creates a uniquely ideal yet practical approach for lenders seeking to maximize value for their REO portfolios. We will inevitably see a significant level of transactions in the auction arena as the market continues to transition. Misha Haghani, Esq., is a director of Sheldon Good & Company, Real Estate Auctions Northeast, New York, N.Y.