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Top dollar.

TOP Dollar

Auctions can fetch a nice sum for REOs, but sometimes require unusual bravery. One lender who summoned the courage to sell to the highest bidder--whatever the price--has found it pays handsomely.

The chill factor was two degrees below zero. Houston--gripped and crippled by these weather conditions--had closed streets, schools and government offices. On that bitter, cold Monday morning of February 6, 1989, several representatives from an out-of-state mortgage company met with a team from an auction firm who had all arrived to sell six real estate owned (REO) properties.

This auction was not to take place in a warm ballroom, but on-site, moving from property to property. Anyone who dared to venture out on the highway faced what seemed certain to conclude as a hair-raising, bumper car ride. There were, in fact, more than 200 accidents reported that day.

A decision was quickly made that the auction would go on in spite of the freezing weather. The advertisement heralding an absolute auction had been circulating for weeks. Operations Supervisor Sandra Catanese and Sales Supervisor Jane Lutins had arrived from Jacksonville, Florida, the home office of Alliance Mortgage Company and the auction team of Daye Realtors and Auctioneers from Baton Rouge were pumped up and ready for a successful day, despite the inclement weather.

Alliance had already held two absolute auctions with Daye, confirming the appeal to a seller of this kind of sale where the property is sold to the highest bidder, regardless of the amount of the bid. In other words, there is no reserve and no minimum bid for a property--it simply goes to the highest bidder whatever the price. So, if bidders are present, the auctioneer will cry "sold" within minutes of opening the floor for bids.

Before the video camera froze during the second sale, it recorded that, indeed, people did show up. In fact, 30 bidders registered and purchased six properties with all but two exceeding 92 percent of appraised value. The crowd of bidders and on-lookers on that dreary, cold day in Texas demonstrated again the power and success of the auction.

The auction process was not new to Alliance Mortgage. Until late 1983, REO property came along fairly infrequently. However, REO inventories began to mushroom in the mid-1980s largely due to the severe economic conditions facing oil industry states such as Louisiana, Texas and Oklahoma. In some areas, values started falling alarmingly at 1 percent, and even 1 1/2 percent per month for months on end. High-paying jobs disappeared, forcing unemployment and relocations for many people. The properties could no longer sell for what was owed, payments could not be met, and in spite of forbearance efforts and intervention by mortgage companies and banks, thousands of foreclosed properties were put on the books of lending and servicing institutions as REOs.

W.A. (Mac) McGriff III, former president of Alliance Mortgage Company, saw that the REO stockpile was building up quickly at Alliance and realized that conventional sales efforts would not help reduce inventory quickly enough. He agreed to take a group of properties and place them in an auction. Alliance then held two successful auctions in Texas and Louisiana with the Auction Company of America in 1986 and 1987. These auctions were done on a "reserve" basis with financing offered. McGriff recalls, "I was extremely pleased with the results. After analyzing the cost to hold the real estate, it was clearly the best decision to sell--in the beginning, on a reserve basis, and later progressing to absolute [auctions], which [generated] increased crowds and prices." The two reserve auctions held in 1986 and 1987 cleared out most of Alliance's oil-state inventory at the time, but property values continued to slip and foreclosures persisted.

In March 1988, Alliance put together a campaign to accelerate the sale of all corporate-owned REOs. As the staff geared up efforts to aggressively liquidate these non-earning assets, Jere Daye, senior partner of Daye Realtors and Auctioneers, was planning some real estate auctions for several Louisiana banks. He proposed Alliance include its REOs from the Baton Rouge area in this sale. Alliance would not offer financing and the "absolute" auction approach was recommended. This was the beginning of an ongoing, evolving relationship using the auction as a vital arm of REO disposition incorporating Alliance, Daye and the mortgage company's Realtor network.

Recognizing the opportunity to capitalize on all facets of influence, Alliance wanted to circumvent the perception by local agents that the auction team represented a troublesome, outside intrusion. As is the case with most auctions, local agents were given an opportunity to preregister a bidder for a typical 2 percent commission, but Alliance also engaged a specific local broker to join with the auction firm in a listing seller relationship. This auction agent performed certain responsibilities to enlarge the exposure of the properties and, in return, benefited by exposing their name to the marketplace and, most significantly, by receiving a commission on each sale, such as 3 percent.

The mortgage company's first sale following this plan took place in September 1988. Alliance was not totally convinced that it could receive market value using the absolute sale approach. In fact, with visions of giving properties away for $5, $10, $50 or $100, Alliance timidly placed two properties up for auction on a reserve basis and only one was to be sold absolute. The property that was "boldly" placed on the absolute auction block was an uninhabitable house appraised at $12,000, if the mortgage company completed repairs estimated at $7,000. It was adjacent to a city park, so when Alliance could not find an "as is" buyer, it decided to give the property to the city. After not being even able to accomplish this, Alliance took the plunge with an attitude of: "What can we lose?" Surprisingly, the property sold absolute for $5,500. "Unbelievable," we thought at first, but this has been our experience when the public is given an open opportunity to buy and establish "true market value."

After the success of this sale, Alliance committed 13 properties in the Lafayette, Louisiana area to be auctioned--all absolute, but this time, with a healthy mixture of properties. Again, auction day was terrifying with the anticipation of possible disaster, but from site to site, sale to sale, buyers appeared from the local area and every town and parish for miles around. The crowds were made up of investors, couples, parents buying for their children, young, old, wealthy and the seemingly penniless. These "penniless" people amazingly would pull out large amounts of cash, sometimes thousands of dollars, so they could be prepared to complete the sale, then and there.

In our usual REO sales, we had long been accustomed to FHA, VA, conventional financing with seller concessions, inspections, lender-required repairs and delays, but at these auctions, most of the buyers were ready to close quickly, either with their own established lines of credit or hard, cold cash--no concessions, just "as is, where is." At the Lafayette sale, the total overall percent of appraised value received for the auctioned properties was 94 percent.

To date, Alliance has completed selling more than 100 properties absolute,--maintaining a record of more than 90 percent of appraised value. All but one property has gone to closing. From southern Florida, to South Carolina, Georgia, Texas, Oklahoma, Louisiana and even North Dakota, Alliance has found the auction to be a legitimate, effective method of real estate marketing without sacrificing value.

Alliance now has less than 10 corporate-owned REOs. But all over the U.S., nonearning assets, in the form of REO, continue to be a substantial drain on financial institutions, and now on the nation, as the savings and loan crisis looms larger and larger. Volumes are being written on how this problem has flourished. Legions of experts are devising answers to the best methods of selling these properties for the highest price, with the lowest cost and in the quickest possible time frame.

REO managers have experimented with various available marketing methods with varying degrees of success. As with Alliance, auctions have been among the front runners of REO disposition for some institutions. An auction conjures up many emotions--excitement, resentment and everything in between. Often, the real estate community and leading citizens see the auction as a threat to the area's property values, as well as an obstacle that prevents the local real estate professionals from reaping the benefits of completing a transaction for the buying public. Many of these agents work months as the lender/owner's eyes and ears, as well as the coordinator of the property's preservation and restoration. Then the sale of the property eludes them due to oversupply, depreciation, lack of financing, or complicated bureaucracies within the institutions for whom the agent is rendering the service. In addition, there is the perception that the auction team completely cuts out the agent and then sells at a price equal to or less than what the agent previously recommended to the lender.

As indicated, there is a way to accomplish a meeting of the minds, whereby the respective disciplines of the broker and auctioneer will benefit all parties. A successful union of the auction method with local real estate efforts can be the best of all worlds for the lender/owner, the community, the buying public and the real estate agency. We are now beginning to see the advent of this, as major real estate companies are developing auction divisions and forming relationships with auction firms.

When the lender/owner decides to conduct an auction, it can select an auction company that has a proven ability to cooperate with local REO specialists, thus creating a top-notch opportunity to sell REOs at real market values.

Real estate agents, the lender holding the non-earning assets and the auction company all have distinct responsibilities to perform in order to produce a successful auction.

The lender

The manager, board or whoever has the authority to make final marketing decisions, should review REO assets and select those that need to be sold. If the properties are auctioned, the individual with the authority to negotiate and commit to a sale on the spot for the lender should attend the auction and be prepared for many challenges. This may include being recruited for everything from last-minute canvassing and clean-up jobs, to circulating through the crowd, listening to the bidders in the group and sensing any obstacles that need to be resolved. At one Houston auction, Alliance had an investor intending to buy a house at a rock bottom price. Also in the audience was a Hispanic couple who wanted to buy the home for themselves, but were struggling to understand what was being said. The agent knew a Spanish-speaking broker from another agency. Alliance offered to compensate the bilingual broker if she would translate for this couple, because a prospective owner-occupant is more inclined to bid higher than an investor. With the help of this agent, the couple emerged as the winning bidder and Alliance got a fair price, more than recouping the extra commission.

The inventory of REOs will usually include an array of properties ranging from those in poor condition and/or located in hard-to-sell areas, to prime properties that need little or no improvements. Regardless, properties that are auction candidates have not sold quickly for various reasons and they need an edge on the market. It is a good idea for the lender to inspect the properties personally to assess the true appeal of the property, its condition and locality.

In establishing a realistic market value, a local marketing study should be completed to include an updated broker's price opinion, area marketing conditions and business and marketing forecasts. Neither an auctioneer nor a real estate agent can assist a lender who regards the book balance as the property's value rather than market value. The market value and the projected time and expense it will take to sell the property should be analyzed in light of what it costs to carry the book balance, as well as any anticipated seller concessions. Weighing all this together should help the lender establish an acceptable sales price and determine a minimum bid, if the auction is to be on a reserve or published minimum bid basis. Alliance found that absolute auctions brought out the most enthusiastic and unreserved bidders, producing the best overall dollar results, as properties were sold with no further negotiations to the highest bidder.

It is important to note that not every property sold at an auction will bring in more than 90 or 100 percent of what is perceived to be its current value. With each auction, some properties will exceed expectations, while others will sell for less than anticipated, such as 60, 70 or 80 percent of appraised value. However, when the auction's results are analyzed, the overall result is usually impressive. Admittedly, it is an agonizing decision for a lender to actually take the absolute auction route. But once experienced, REO/lenders usually will readily confirm that this approach has a lot going for it.

After the lender considers the appropriate auction methods and recognizes the market and the condition of the properties, decisions must be made as to what, if any, improvements and repairs should be done. Every attempt should be made to convey to the public that the lender recognizes and observes the pride of ownership shared by other homeowners in that neighborhood. However, even though lenders make an effort to ready a house for sale, some REO properties can only expect to bring a land value price. Even though REO auctions are generally thought to be "as is" and "where is," sometimes inspections, certifications and improvements can overcome serious marketing obstacles. Cathy Rhoden, senior marketing specialist at Alliance, once had the opportunity to inspect some New Orleans properties a week prior to the sale. A rush inspection for termites and structure on one property produced certifications that overcame a perception of serious problems, which resulted in better bids. The repairs that were completed to secure those certifications cost less than $300. Some minor costs should be incurred to make the property presentable. Such expenses include mowing, trimming and edging the yard, plus cleaning the interior to present a property that looks and smells clean.

Other steps lenders should not overlook include: obtaining private mortgage insurance approval if the claim for loss has not been paid; ordering an updated title opinion if not provided at the point of the foreclosure sale; clearly explaining to local real estate agents what pre-auction duties they should perform and their role through the point where the buyer comes to the closing table. Finally, REO lenders need to decide whether or not, and if so, at what terms, the lender will be providing financing. If cash for the properties is the only option, contacting local lenders to be available or providing counseling to direct buyers should be considered.

The real estate agency

In this auction arrangement, the auction company is the seller/broker side of the listing seller/broker relationship. A relationship of trust, communication and cooperation between the auction team, broker and lender/owner must be established.

The real estate agency is the local representative who will keep visible in the market the notice of the upcoming auction. These agents must penetrate their own market with the news of the auction sale, thus supplementing the auction company's mass advertisement campaign. The real estate agency can play a creative role in generating auction excitement. Real estate agents will discover that people who would never walk into their sales office will come to an auction to do business. Many of these prospective buyers have readily available sources of cash and often are able to close within days.

The agent will be responsible for answering questions about REO auction properties, holding open houses and also presenting the property in the best possible light. The cooperating broker's name is advertised in the brochure, along with the auction company. At a Pensacola sale, I arrived just before the sale and did not have directions to the first property. I called the cooperating agency to get the best route and was passed around on the phone until I finally got the information. That is obviously not acceptable. The auction should be highly promoted to everyone at the real estate agency. Local agents need to be educated on making the most of this REO lender arrangement. In return, lenders should convey their high expectations. In fact, if possible, it is beneficial to hold an auction seminar with the local real estate company a month or so prior to auction day.

The auction company

The auction company is the catalyst. It exposes the REO property to a broad market and creates excitement, desire, and a gathering place for bidders.

The company's knowledge and expertise must include real estate and the appropriate housing markets. A property located in a resort area would draw prospective buyers from a much broader market than a property with buyer appeal limited to its own locality. When Alliance held a ballroom auction in Destin, Florida, buyers came from Chicago, New Jersey, Atlanta and many other distant cities. Targeting the marketing of these properties to these diverse audiences through effective advertising is key to a successful auction.

The astute auctioneer has an acute awareness of both the REO owner's and buyer's concerns. This is essential to encourage the bidders to the highest purchase price. We have observed Tom Baudry, one of the Daye partners, call an auction and form an uncanny bond with the bidders--sensing when to push, when to pause, when to ease the crowd with a joke and when to declare, "SOLD." This is the kind of knowledge, expertise, salesmanship and even showmanship that enables an auction team to produce favorable results.

The auction company should have a proven track record of professionalism, salesmanship and ethical standards. This includes treating the public with respect, communicating clearly so participants come away pleased with their purchase and leaving all participants with the feeling that they were dealt with fairly and honestly.

Alliance's auction experience spans a period of four years. During that time, the company has increasingly improved its record by studying and knowing the markets, preparing its properties, investigating possible local financing, selecting agents who can enthusiastically embrace the auction method, and by carefully choosing an auction team who performs to its expectations. There's an increased appreciation of the buying public and what motivates them. That understanding has brought Alliance to rely almost exclusively on the absolute auction method. That has been the case for more than two years. As a company, Alliance set goals, knew the obstacles, developed solutions and selected agents and an auction company to accomplish drastic reductions of REO inventories at acceptable terms and prices.

Cynthia Logan is assistant vice president in charge of managing REO and loss mitigation at Alliance Mortgage Company, Jacksonville, Florida.
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Title Annotation:auction of real estate owned properties as practiced by Alliance Mortgage Co.
Author:Logan, Cynthia
Publication:Mortgage Banking
Date:Oct 1, 1990
Previous Article:Servicing's cost code.
Next Article:FHA's roots.

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