REQUIRED READING: Exposing REO Properties To A New Breed Of Buyers

gh state-level foreclosure moratoria and the eviction suspension imposed by the government-sponsored enterprises have slightly lessened the inflow of real estate owned (REO) properties that asset managers must handle recently, no one is denying that inventories are still high. Last year's record supply numbers undoubtedly caused many servicing shops to take another look at their approaches to asset disposition, and one of the oldest methods – the auction – continues to be embraced. The reason for the still-growing acceptance of auctions is simple: exposure. Gone are the days when home buyers searched only newspaper listings and real estate guides. Today, the first stop for many buyers is the Internet, and that is a trend that has not gone unnoticed by auction companies. "Whether it's a ballroom auction, site auction or Internet auction, if through any one of these a property is accessible through the Internet, it just completely changes the dynamics of the audience," says Claudia A. Smith, executive vice president of operations for SafeHaus Asset Management, an REO management and marketing outsource company. "It gives you a much broader exposure for a very focused time period." Scott Richards, who leads a team of account managers in NRT's REO Experts brokerage division, agrees, noting that the Internet is available to potential buyers from around the globe. "Online auctions give us a lot of exposure that we're tapping into that we wouldn't have normally had," he says. "The overall execution on a property may be a little lower than otherwise, but if your inventory's taking off like it was in early '08, that's how you stay ahead of the game." Richards has brought 150-250 properties to auction per month, on average, and he estimates that NRT, as a whole, has auctioned between 5,000 and 6,000 properties in the past 12 months. [b][i]Ensuring top prices, minimal fallout[/i][/b] With increased exposure comes a relatively new entrant to the auction space: the non-investor home buyer. Whereas the majority of auction activity five or 10 years ago was limited to investors, the general public – buyers who are looking to live in a home rather than flip it – has become more accustomed to the auction scenario, Smith observes. The shift is not dramatic, according to Richards, but he says the pendulum is, nonetheless, swinging away from the large-scale investor community. "It's more smaller investors – individuals as opposed to corporations," he says. "But the problem we're also facing is the ability to finance these properties. We're seeing probably double the fallouts in the last couple months that we saw earlier in [2008]." To hedge against the risk of fallouts, Richards' group has adopted a cash-only policy for sales less than $50,000. Moreover, the company avoids financing auction properties, which reflects the all-but-complete disappearance of seller financing – a result of today's tight credit markets. Also important for asset managers, he notes, is for auction companies to have prequalification standards that are commensurate with investors' expectations. "If they submit their contract without an earnest money deposit and without a solid prequalification, we're not even considering them," Richards says of buyers. "And if they delay on that, we'll get rid of the deal. If you can't deliver something right away, then you're probably not as solid as you think you are." Of course, prior to a bid's being accepted, a starting price must be determined, and that is a process that asset managers suggest is not always without complications. Auctions are unique in that they reflect – usually accurately – how a market views the value of a given property. But what they can also achieve, as Smith points out, is a sense of competition among buyers that ultimately benefits the seller. "It oftentimes will capture a higher price simply because of the competitive nature of the general population," she says. "Because once you've decided you want to buy something, you don't want somebody else outbidding you." A high starting bid that receives no takers will only confirm the suspicions of a hesitant buyer sitting on the sidelines. With that in mind, many asset managers prefer to drive a bidding war by offering a low initial price. Getting investors to sign off on a low price, however, can be challenging. Justifying a low number requires servicers to do their research and present investors with contextual data, such as a history of offers and values received on a property, neighborhood information and past auction activity in the community (including failed auctions). During post-auction negotiations, Richards has certain levels of authority delegated to him by his clients (i.e., lenders), but further approval is sometimes necessary. Wherever possible, the investor, servicer or asset manager, and auction company should streamline the approval process and eliminate unnecessary channels. "I think the greatest success that you have is when you and your client are on the same page, and you're unified as far as what you can and can't do," Richards says, referring to the lender-broker relationship. "If you don't have an approval process in place – or if it's just kind of come-and-go – then things go slower, and you're not going to be as successful." Having established guidelines in place provides all parties with a clear understanding of who has the authority to approve what. Ideally, the process should be finished in a matter of days, not weeks. [b][i]When does an auction make sense?[/i][/b] While deciding whether or not to dispose of a property via auction, asset managers remain mindful of geographic trends. Some Rustbelt states have been "overauctioned," according to Richards. Their markets are oversaturated with property auctions, and "there's only so many investors in those markets," he explains. By the same token, regions that are more familiar with the auction process – namely, rural areas – can, in turn, result in an audience of buyers that have a higher level of comfort with bidding on a property. For urban centers, where real estate auctions have historically been less common, the Internet again brings an added layer of exposure. "You have to understand your markets," Smith says. "You have to understand your buyers in the market. There are some geographic differences." While Internet auctions are beneficial because they can be used by bidders nationwide, ballroom auctions and site auctions benefit sellers in other ways. Ballroom auctions, where the bidding process is live and in-person, cranks up the competitive-nature factor that Smith describes, which may result in a higher-than-expected sales price. Site auctions, meanwhile, may be more appropriate for certain property types. "They're good for unique properties, or properties that don't have good access and visibility," Smith says. "Those type of site auctions have a tremendous success r