Sage Auction Blog

Happy New Year - Be safe and have fun in the new year.

This a fun video wish I could fly as well.

GOVERNMENT WORK, IT’S NEVER EASY

 When offering any kind of product or service to a Government agency a learning curve presents itself in the form of the Agency’s SOP, which stands for standard operating procedures.  In the case of a Government guaranteed loan, the SOP must be followed in order for the financial institution to receive it’s loan guarantee.  If they do not or the Agency does not believe they have followed the SOP then the financial institution will suffer the loss, which in this economy only adds insult to injury.  

As you can imagine an auction company working in an area of the country where auctions have never been used before will cause the lender of Government guaranteed funds to look to the government agency for approval of our services.   The situation gets even more complicated when the agency can not legally recommend one particular company over another.  However, we are not asking the agency to recommend our company over another but rather the service we provide be approved as part of the liquidation plan. An interesting aside to all this is the fact that the Agency’s SOPs allow the guaranteed lender to use auction sales to sell their collateral.  It’s kind of like that software manual that came with your PC, we don’t read them.  We depend on a friend or colleague or attend a seminar, but we don’t actually read the manual. Same often seams to hold true for a Government Agency’s SOP. 

 Jason Rose a real estate auctioneer from down under. Posted a great video explaining RSS feeds. If you've ever wondered what the heck is an RSS feed take a look.

RECOVERY FOR SOME MARKET’S YEARS AWAY

 That was the headline of a recent story in the Phoenix Business Journal, written by Mike Sunnucks.  He interviewed an economist Elliott Pollack who states that Phoenix is tied with Riverside CA area for underwater mortgages at 50%. Las Vegas being the leader with 70% in a negative equity position, which is stunning when you realize, according to one asset manager I spoke with recently, that real estate values in Las Vegas have fallen 55-60%.  Stop and think for a moment, how many years of appreciated values will it take that market to regain it’s losses? Even if their market suddenly appreciated 10% a year it would take 4 to 5 years and at this point the market is still dropping.

Additionally, ASU economist Lee McPheters said Arizona’s official unemployment rate is 9.3 but is probably closer to 15 percent due to the large number of unemployed who are no longer looking for work.  His conclusion, “it may take until 2013 for the state to rebound from its recession job losses”. In my humble opinion that is being aggressive but it depends on his definition of “rebound”. Especially when the Associated General Contractors of America predicts another 430,000 construction jobs will be lost in 2010. Bringing the number of unemployed construction workers to nearly 20%   Add to that fact people without jobs don’t buy homes. And people who loss their jobs usually find their credit scores going way down which means, in todays credit market, they are effectively eliminated from qualifying for a future loan when they do find work. 

Pollack added this bit of great news, (which for some reason is missing from CNN or MSNBC’s reporting) “distressed home loans in Maricopa County in the foreclosure process stands at 50,000, compared to 28,000 in 2008 and 10,000 in 2007”. Really sounds like the Phoenix market is racing back and the recession as a whole is over, huh.  He concludes with this comment, “This is a downturn of Biblical proportions”.  If it is a crisis to rival the plagues of the bible or the Noahatic flood then why isn’t the media referring to it as such?

Cap Rates, where are they now?

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While everyone understands the commercial real estate markets are in trouble, few comprehend the problem’s full magnitude. Values have dropped in most markets, but the amount of adjustment is difficult to ascertain due to the lack of transactions.

Earlier this year, Green Street Advisors, a real estate investment trust advisory firm, described the economy’s impact on commercial real estate as a one-two punch. Green Street predicts that capitalization rates will return to pre run-up levels due to more-expensive debt and increased return requirements. It's called the “969” phenomenon, which is a pattern of cap rates, not an area code. In other words, cap rates were close to 9 percent for many sectors early in the decade, dropped to 6 percent in the easy-credit environment, and will return to the 9 percent level when the market stabilizes.

Real Estate Brokers don't make good Auctioneers

I've been approached by a number of real estate brokers over the years wanting to get involved in real estate auctions. Most simply want to do a few auctions when things get slow or to be able to say to clients that they can conduct auctions so they don't lose a sale to the local auctioneer.  A very, very small percentage ever make very good auctioneers.  Not because they can't learn how to chant, it really has very little to do with their ability to learn how to bid call. It has to do with the nature of their business model as compared to that of an auctioneer.  I've come to learn that it has nothing to do with their outlook on our business or whether they are good or bad people, it really doesn't have anything to do with that. It's just the differences in how brokers looks at a real estate transaction and how an auctioneer looks at a real estate transaction.  

Auctions Deliver the Market

I had to write a note about the luxury condos we sold recently north of Seattle Washington. Prior to our auction the condos had been listed for sale with two  real estate brokerage firms - doesn't broker imply they sell something- for over 16 months with one viewing and absolutely no offers, not even a low offer. We took the property to auction after just 4 weeks of intense marketing with 330 potential buyers viewing the properties, 9400 visitors to our website, 4300 absolute unique page views and three different news outlet picked up our news release, resulting in 22 pre-qualified registered bidders. The condos average selling price was $187 per SqFt.  Before you consider this a low number and it is, consider that condo sales in this market drop by 41%  from July to August with the average selling price being $180 per SqFt.  No matter how you slice it we definitely delivered the market.  

Why do auctioneers use a “secret” reserve selling price?

This question has been posed to me many times usually by a real estate agent or broker.  And now that auctions are becoming a much more popular way to sell real estate, I am beginning to see some “auctioneers” publish their reserve selling prices.  If they do it’s a pretty good tip off that this is someone new to the auction business or they don’t use auctioneers but sell through a seal bid auction format or they are a real estate broker getting into the auction business.  The reason being is that Realtors have a very difficult time working with out a list price. If they have been in the brokerage business for any amount of time at all, a “list price” becomes part of their DNA. For many Realtors, selling a property without a disclosed “list price” is like walking a tie rope without a net. For example a group of ReMax real estate brokers file suite with an auction company in Southern CA for fraud because they did not advertise the reserve selling prices of the properties they were auctioning. When their clients high bid was rejected by the seller and the reserve was revealed the ReMax agents accused the auction company of a bait and switch scheme.  They evidentially did not hire an attorney with much auction experience however, it would have been a very simple matter for their attorney to consult the US Universal Commercial Code ( UCC - the law governing all auctions) to realize that the auction company and their sellers were within their right to accept, reject or counter the high bid if it did not meet the seller’s reserve selling price.  A reserve selling price may or may not be made public, there are no laws requiring it to be made public.  Another part of the UCC that buyers should be aware of, but may not, is the difference between an absolute auction and one with reserve. Absolute auction means the property will absolutely sell to the highest bidder regardless of the high bid price.  Also the term Absolute auction or auction without reserve must appear somewhere in the advertisement for it to be an absolute auction.  If the advertising does not contain one of those phrases the auction is assumed to be with reserve. Nowhere in the advertisement must the auctioneer advertise the auction as a reserve auction in order for the property to be sold with reserve - disclosed or otherwise. So if you do not see “Absolute Auction” in the ads then the property will sell with reserve.

HAS YOUR REALTOR BECOME AN AUCTIONEER ?

Realtors use a static pricing system to present a property to the market.  Typically a list price is determined, based on comparable sales data, appropriate adjustments for time, and in this market an awful lot of guess work.  The property is advertised and placed on the local MLS and probably Realtor.com. Open houses are scheduled and a realtor usually sits in an empty house for the better part of a Sunday afternoon.  Then they wait, and wait and possibly wait some more for the phone to ring.  You start to see why I’ve call it a static pricing system. Without a mechanism to encourage competition or create urgency on the part of the buyer, the seller can feel as if they are being circle by sharks waiting for a sign of weakness.  Therefore, most Realtors will suggest to their sellers they reduce the list price by 5% or so every month or two until a buyer bites, pun intended.  In effect they have become auctioneers.  Wait a minute doesn’t an auction start with a low bid and work its way up?  In a traditional or western style auction they do, but there is an auction that works the other way around. It’s call a reverse auction or Dutch auction, where the price comes down so much over a given amount of time, until the first buyer to raise his hand becomes the winning bidder. That’s what realtors are asking their clients to do in the current buyers market.  It appears safe but its reactive and allows the buyer to drive the transaction, without I might add any form or competition between buyers, just first hand in the air (or signed offer) becomes the winning bid.  

NOT AN AUCTION BUYER ??

We auctioned a home and acreage the last weekend in June and it did not sell at the auction. It was really a bank ordered auction but a complicated sale due to the local bank loan being guaranteed by the FmHA (the Feds). Which means that decisions are not usually made fast enough, but in our case they did a pretty good job of working with us and our time line.

After the high bid at the auction was rejected $96,000 (we knew it would be) we put an ad in the local paper and advertised it at FmHA's reserve selling price of $110,000.  So the list price was a take it or leave it price, but it was about 25K less than anything else even closely related to our property currently listed. The bank was motivated and it was a reasonable reserve selling price.  We had a ton of calls on the ad, I showed it 14 times last week, and we received a full cash offer within the week, but of course we would accept nothing less.  It's been a while since I've had to work as a Broker (I'm licensed in three states), which reminded me why I don't do listing and it refreshed my memory concerning a couple of things we should be doing at our opens.