In July, former Lehman Brothers CEO Richard Fuld announced that he would be selling his 71-acre estate at auction for an expected $30 million to $50 million.
Far from being in a distressed condition, the property, called Big Wood River Estate, has 11 bedrooms between three houses and comes with 2,100 feet of riverfront land.
If that runs counter to your idea of the type of property that is typically sold at auction, you’re not alone. At the height of the foreclosure crisis, banks auctioned off houses in conditions that embodied the word distressed — gutted shells with everything of value stripped out.
Today, the market is much different.
Concierge Auctions, the firm offering Fuld’s house, was recently ranked as one of the country’s fastest-growing companies. It has closed more than $780 million in luxury properties since 2008, and a typical sale ranges between $2.5 million and $30 million.
The split personality of real estate auctions — selling properties at both the lowest and highest ends of the spectrum — makes sense. Distressed properties on the low end typically don’t qualify for mortgages, and buyers of luxury property can pay cash.
Distressed sales have been steadily decreasing, accounting for only 8% of single-family sales in June 2015, according to RealtyTrac’s June and Mid-year 2015 U.S. Home Sales Report. This compares to 19% in June 2014, and an astounding 45.9% of all single-family sales at the peak of the foreclosure crisis in February 2011.
Does that reduction in distressed assets mean the best days for auction companies are behind them? Apparently not.
“What’s interesting is that as the number of distressed homes that are sold continues to shrink, our numbers are going up,” said Rick Sharga, executive vice president at Auction.com. “We sold almost 50,000 properties last year, and we’re on track to sell more than 60,000 this year.”
And he’s not alone.
Trixy Weiss is the founder and CEO of Genesis Auctions, which merged with industry stalwart Hudson & Marshall in February. “Hudson & Marshall doesn’t view the reduction in distressed inventory as a negative. In fact, it’s a great opportunity for auction as a disposition method to expand its definition and scope and integrate more fully into the traditional real estate space,” she said.
“We are already seeing increases in many new innovative REO programs coming from servicers that blur the lines between auction and traditional sales.”
Auction companies are not sitting idly by as the number of foreclosures shrinks. They have aggressively pursued technology and process innovations to gain a greater share of the overall real estate market and upend traditional transaction models.
“We believe we have the opportunity to disrupt a very archaic marketplace badly in need of change,” Sharga said.
A NEW MODEL
The auction model is uniquely suited to the swelling consumer desire for faster, easier and more digital real estate transactions.
Unlike traditional closing processes, the online auction offers a degree of certainty for both homebuyers and sellers.
“Time certainty is a big advantage of the process,” Sharga said. “Research shows that the most uncomfortable period of time for a home seller is wondering if or when someone is going to make an offer on their property.”
An auction removes this anxiety because it takes place on a particular day, set up in advance, and the reserve price ensures that sellers get the price they want.
For potential homebuyers, the most stressful time is after they make an offer. In a traditional sale, would-be buyers make a bid and wait for decisions to be handed down, without any visibility into the amount of other bids, or what it would take to win the property.
“With auctions you know you made the best and final offer. With a traditional process, you have no idea what happened. This is why auctions are hugely popular among buyers and sellers,” Sharga said.
While certainty is good, the online nature of auctions may be their biggest ace in the hole.
The 2015 National Association of Realtors Profile of Home Buyers and Sellers found that 50% of homebuyers used a mobile or tablet website or application in their home search. That’s up from 45% from 2014, and no one doubts that number will only keep growing.
That puts online auction companies in an enviable position, since they are used to engaging their customers — both buyers and sellers — in that space.
Auction.com launched an iPad native app last year that more than 100,000 people downloaded, accounting for tens of millions of dollars in sold properties. And an iPhone app the company launched in January allowing people to bid on properties from their phone proved wildly popular — selling 10 homes in the first 10 days.
That leap into the mobile sphere didn’t happen by chance. In 2014 Google Capital made a $50 million investment in Auction.com, giving the company both the money and the expertise to blow open the doors to mobile expansion.
“Our experience is beginning to show that the younger the potential homebuyer, the more comfortable they are with online transactions,” Sharga said.
“The next generation of homebuyers and sellers buy and sell everything online, so they will expect and demand that when it comes to buying a house.
“That doesn’t mean they don’t want to visit the house or neighborhood, or work with an agent to help with the transaction, but they don’t really understand the need to get away from their desktop or laptop, or why they wouldn’t be able to do closing documents in pajamas.
“They are used to the ease and efficiency of online transactions, so why wouldn’t they expect that when buying a house?”
This is the real opportunity online auction companies have — the market, in many ways, has moved to them.
“Auction has the opportunity to help bridge the gap between offline and online real estate and become a marketplace that embraces all types of assets and various disposition methods,” Weiss said.
“We see auction’s role in the real estate industry expanding, while also embracing the role and value of the real estate agent. With cutting edge technology and expertise in online property sales and marketing, auction has an important place in the future of real estate,” she said.
But to the extent that the majority of homebuyers on auction sites are investors, the opportunity to disrupt the traditional marketplace is limited.
Which is why the traditional marketplace should be afraid.
CONSUMERS ARE ALREADY THERE
For most of their existence, auction companies were the domain of investors. And in a market where the return on investment is so low across the board, U.S. housing is still very attractive.
For instance, although cash sales have been falling as an overall part of the market, there are more than 20 markets where cash sales have actually increased in the last year. According to RealtyTrac’s June and Midyear 2015 U.S. Home Sales Report, “In New York and 20 other markets analyzed for the report, the share of cash sales increased from a year ago, counter to the national trend.
“The New York metro share of cash sales increased from 40% in June 2014 to 49% in June 2015. Other markets with an increasing share of cash sales included Raleigh, North Carolina; Greenville, South Carolina; Bellingham, Washington located between Seattle and Vancouver, Canada; Knoxville, Tennessee; Providence, Rhode Island; and San Jose, California,” the report stated.
The global appeal of U.S. real estate is good news for auction companies, and Sharga said that bidders on Auction.com come from more than 100 countries.
But investors aren’t the only ones interested in auctions these days. In survey results from last year, Auction.com found a startling 30% to 40% of its registrants were owner-occupants — people who wanted to buy houses to live in them.
Registering at Auction.com isn’t the same as browsing the Internet for houses. It requires a $2,500 hold on a credit card, proving that these are serious buyers.
“We were surprised,” Sharga said. “We don’t aggressively market to traditional homebuyers — they are finding us. What that tells me is that the market is ready for online real estate sales more than the industry thought it was.”
And for those buyers who don’t have cash on hand, auction companies are offering various financing options that connect potential buyers with lending partners who understand the auction environment, eliminating one of the biggest obstacles to purchasing through auctions.
What will it take for auction houses to grow their presence in the overall housing market? Something they already have in spades — data.
Imagine having a database full of contact information for people who are actively searching for houses to buy and sell. Even better, imagine knowing what kind of house they have bought or sold in the past, what price range they are looking for and any number of other specifics.
It’s a marketer’s dream come true, and the auction companies are dreaming big.
“We have several million investors in an active database,” Sharga said. “This is an investor database that has taken us the better part of a decade to build up. This is not a list that we rented, but people we have been dealing with on a daily basis.”
According to Sharga, Auction.com spends $30-$40 million a year marketing properties for its sellers, bringing about 1.5 million people to its website every month.
Combine that kind of big data capability with the growing demand for easy, quick and mobile transactions, and an industry disruption becomes more than a possibility.