Sage Auction Blog

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. 

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.

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.  

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.

RED FLAGS

I do a lot of training with, new to the business, auctioneers. Most are excited about being in this new profession and approach it as a real estate agent would approach booking new listing. Problem is, in this business we are all about selling and not about obtaining new listing. I have a complete section in my Real estate Boot camp on qualifying sellers.

Additionally, I put together a, sort of down and dirty, way to determine if in fact we can be of any help to a particular seller.  You see, I'm not in this business to see how many listing I can book, or conducting auctions that I know we have no hope of selling or spending tons of my clients money just to see my company's name in the newspaper.  I'm in this business to help people solve a particular problem AND I know that for 75% of some people (residential sellers) I won't be the right choice, and for 95% of other people (Ag land sellers) I'll be their best choice.  Anyway, here's my list.

BANKS MANAGE RISK ?

Everyone knows by now that we are in a housing “correction” to put it nicely. The price of homes has been in a free fall for the last twelve months (at least) and the market for new home construction is, well, ugly. The largest builder in Iowa closed its doors a few weeks ago and told its employees to go home. And it had over 200 homes in various stages of construction.

In a recent meeting I had with a senior banker he indicated that his bank did in fact have  foreclosure inventory on the books and would have more. But the Polk County Sheriff’s office was backed up four months due to the high volume of properties going to sheriff sales. WOW that is saying something especially for a conservative (financially) state like Iowa.

Smoke and Mirrors Marketing

No Commission ??
The seller will pay no commission to the Auctioneer, the buyer will pay our commission through a buyers premium.  Read carefully, and see if you can find who really pays the auctioneer.

The use of the buyers premium (BP) by auctioneers has been in practice since the 1960s. It’s charged by the auctioneer and when used, the seller pays no sales commission, ya right !

The reason I subtitled this entry, “smoke and mirrors marketing” is due in part to the way in which most auctioneers explain or “pitch” the BP to prospective sellers.  Most, incorrectly, pitch the BP to sellers as a way to sell their property without paying the auctioneer a sales commission.  The second incorrect statement made by most auctioneers, is the auctioneer charges the BP. The pitch usually goes something like this;