On Friday, October 24, the Norris Group proudly presents its 7th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event could not have been possible without the generous help of the following platinum partners: Auction.com, HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association and President Bill Tan, InvestClub for Women and Iris Veneracion, San Jose Real Estate Investors Association and Geraldine Barry, MVT Productions, and White House Catering. For event information, visit isurvivedrealestate.com.
Bruce Norris is joined this week by Rick Sharga. Rick is the executive vice president of Auction.com. Bruce has known him for many years, going all the way back to RealtryTrac and Carrington.
Auction.com is really quite a success story. Bruce happens to know a builder who had some unsold inventory in Riverside, and he gave the young man a chance to auction the property. This was in the middle of 2005. Auction.com, in its current iteration, started in 2007. There have been predecessor real estate disposition corporations as well as land auction companies the owners have founded, but these were shut down when they took on a new investor and started Auction.com in 2007. This was just in time for the mortgage market to melt down and there to be thousands of foreclosed properties that needed to be disposed of quickly. There are a lot of other existing auction companies too. These all could have exploded, but Auction.com was of the few that did. Bruce asked how this occurred, to which Rick said there are a couple reasons. The founders are particularly adept at shifting as the market needs shift. They run a very tight shift in terms of the auction operation itself, so we can execute and grow more rapidly than the other companies.
Sometimes the secret sauce comes down to being better capitalized. At the time when expansion was needed, they had adequate capital to handle the expansion. What a lot of people do not realize is how expensive it is to run an auction and that there is risk involved because typically an auction company does not get paid unless there is a successful transaction. You can go broke pretty quickly if you do not know how to manage that cash flow. When Auction.com got into the business during California’s downturn, there were ballroom auctions. This is what auctions did at the time. Rick said he spoke to a group of realtors earlier, and he had to explain to them that when the company was founded it was taking on huge portfolios of properties from enormous financial institutions and selling them off at these gigantic ballroom auctions where there would be thousands of people and properties changing hands in the course of a day. That business model was very effective for what it needs to do. It really did not have a role for the realtor at that time, so what they are doing now is figuring out how to work better within the realtor agent broker community. However, this is how the company started.
One of the insights the CEO had was the opportunity to take this business and make it more of an online marketplace, creating an eBay for real estate. This is one of the huge differentiators between Auction.com and virtually every other auction company in the country. Bruce said the Norris Group really thought of starting an auction company. They held an auction in 2007/2008, and he and his sons along with a few others worked harder on that than anything he had ever worked hard on in his life. They had 15 properties to sell, and they sold one. At this point they were so happy to not be in the auction business. His sons were a little disappointed, but Bruce told them he had never been more proud of a failure in his life. There was nothing they could have done that they knew how to do any harder. They did not know something that they should have done because it is not easy.
It was not easy to get a crowd there, and this is why Bruce looks at this business and sees how it had to change. It has had to invent itself a few times over. From what Rick said, it is about to do it again because all of the inventory that was obvious, such as the REOs, is not true now. Typically what happens to the auction business cycle is you might have a chance to explode like Lazum did when they had the HUD auction contract or Kennedy Wilson. When things go back to normal and the builders don’t sell their things, you have an auction for this. All of this is not the obvious inventory anymore. They have been diversifying, and step one of that was to move into the commercial space. This is a very vast growing part of the business right now. Last week they had a one-day auction where they sold over $140 million worth of commercial properties in one day online. Bruce saw this and wondered if they were still going to do single-family homes. Last year they sold 35,000 properties, and it was about $7 ½ billion in sales. The overwhelming majority of these were residential properties.
If you are looking at where the market is going, then you need to diversify. Rick said because of this they are moving into commercial as well as moving very specifically into commercial properties that are not distressed. This is a pre-cursor to where they hope to go in the residential market. They think it is better to start with the commercial market simply because you are typically dealing with more sophisticated buyers and sellers as well as working with fewer properties. You can kind of get the bugs out of the system early on. When you do launch something broadly to the residential market, it really needs to be pretty seamless and almost idiot-proof so that the average internet user can participate.
Something that has been very difficult for the whole industry and is something they would have to overcome is the stigma of one saying their house is for sale and would have to auction tomorrow, and nobody is pleased. The younger you get the less automatic that stigma becomes. Rick said they are about to see the next generation of homeowners enter the market having grown up purchasing everything online. They have become very familiar with sites like eBay. Auction.com typically refers to themselves as eBay real estate. A lot of those beliefs will diminish, but the other thing that is a very real possibility and not inconceivable is in the future every property on Auction.com may not be a traditional auction. There could be some properties up there that are listed for a certain amount of money on which you can make an offer as opposed to the traditional auction methodologies. They continue to test all sorts of different ways for doing business online.
What attracted Rick to the company in the first place was his belief that it is inevitable for properties to change hands online. Ultimately, the internet will have the kind of efficiency, transparency, and reach that makes it inevitable for people to buy and sell homes on the internet. In a way it is very smart for him to keep referring to eBay since this is a site that Bruce trusts. He bought something, and it showed up. This means somebody actually had it, he paid for it, and nothing bad happened in the interim. This is the model that people can understand. It is a legitimate transaction and you do not physically have to be there and go into an escrow room. This is a transition that is really not easy for an entire industry to take on.
One of the main reasons Auction.com recruited Rick was because they needed to be a trusted brand in that equation. People need to believe if they are going to Auction.com it will be a legitimate transaction and that they have done some diligence before a property goes online. They can also trust what is going to happen. They are seeing a lot of real estate documentation becoming digitized. Companies like DocuSign are getting a lot of traction, as well we are looking at financing being available online. You will be able to do 90-95% of what you need to do from your iPad while you are watching your kid’s soccer game. It will be a whole different way of doing business in the real estate industry than what anyone grew up doing.
Bruce said one of the things he realized when they attempted that auction was they did not have a pool of anybody who was a buyer. Rather, they were starting from scratch. Now, as you go on and on, when Auction.com has a property for sale they already know they have the huge audience that will look at whatever they have. When you are looking at some of the things that differentiate companies, they probably spent $40-$50 million last year on marketing properties. This is done in order to make sure that when they have the properties up they are getting bidders. Part of the equation is also how good they assets are you are trying to sell. For some properties, no matter how many people they target they are not going to find anybody raising their hands. This is the nature of the business, but this is also one of the reasons it is so expensive to be a successful auction company. You spend a lot of money, energy, and time to try to attract buyers to each event.
There are several types of auctions that are possible, and Bruce wondered if they ever used absolute auctions. Rick said they rarely use an absolute auction. This is the type of auction where whatever the winning bid is, the seller will be compelled to sell for that amount. This is something the buyer would love to have, especially if they are the only bidder. Virtually 100% of their auctions are reserve auctions, which means that unless the bid reaches that reserve amount, the seller is not obliged to sell the property. They try to help the bidders get as close to the reserve as possible, and a fair amount of sales take place below the reserve. It is interesting to watch these things unfold from the operations center that they have as bidding activity reaches the end of the auction.
In the documentation they have, they are informing other bidders in writing that they are allowed to bid on behalf of the seller up to a certain point. They never bid beyond the reserve number, and they are very careful about bidding close to the reserve because they really don’t want to be the winning bidder. It is a little confusing and sometimes off-putting for people who aren’t familiar with how auctions work, but it is essentially how the negotiation process works in an auction. It is the best way so far to get buyers’ bids close enough to the reserve price for the sellers to legitimately consider the offer. They are actively exploring other approaches that will make that unnecessary simply because it is a little bit of a controversial practice and makes some people uncomfortable. Bruce said he can understand this from a buyer’s and a seller’s point of view. If it could be resolved in a way that everybody is happy, that would be nice.
On trustee sales in California, it went from no one doing it other than the individual trustees to Auction.com owning it. Bruce asked if this is true across the country that you have really started to dominate most states that have trustee sale processes. Rick said they have done trustee sales in virtually every state that does non-judicial foreclosures. They are probably still very active in about ten. In some cases there is simply not enough volume to really warrant staging a full formal auction. In the order of whether or not this should be a big surprise, amazingly enough when you put professional auctioneers in place and have them auction off property, they sell them at higher prices. The servicers’ lenders seem to appreciate this because it minimizes losses. Once they were able to put their stake in the ground and show the lenders and servicers and trustees that they could get a better result for them. It really did take off like wildfire.
It also did not hurt anything that they started doing this at the same time lenders and servicers started getting serious about selling property at these foreclosure sales. For a number of years, virtually everything was going REO. You had very few of these sales taking place as they were scheduled. The pricing is getting a little more realistic since prices have been trending up and a little of it was being at the right place at the right time. Talking about trustee sales, usually the local laws require a live auction at a location. Bruce asked if this is why these are not being done online exclusively, and Rick said this is exactly correct. For this reason they are marketing the properties online. They are conducting auctions they believe are much more open than a typical trustee sale has been over the years where you see a mysterious guy with a clipboard surrounded by four local investors. A lot of the investors said early on that they really didn’t care for the fact that they were there because they were getting more competition and prices were going up. On the other hand, they appreciated the fact that they would often bring coffee and doughnuts.
Bruce asked which side is more repetitive for Auction.com, the sellers or the buyers. Rick said initially it has been the sellers. They were dealing mostly with large financial institutions, which would have had repetitive inventory. What they were seeing is what they hoped would happen, which was more of a marketplace effect where the buyers who were used to coming to site and buying multiple times over the course of the year are now approaching them to sell the properties. This happens when their business models change or they have a property in their portfolio that does not fit their business model. They do have repeat buyers and a VIP program that gives buyers the opportunity to get a personal account manager at Auction.com to help them through the process or alert them to properties that fit their models. They are seeing repeat buyers, but this marketplace where buyers ultimately become sellers is fascinating to watch and necessary for the future of the business.
To have repetitive business, it will not be B of A’s REO pool anymore, but rather the clientele that does much less volume but does it often. Rick said this is an interim step before they enter the mainstream market. Their goal is to work with all the institutional and individual investors who bought properties on their platform encouraging them to resell the properties back to them when they are ready. Bruce asked about the availability of financing and how this works for investors or an occupant buyer. Bruce asked if it is available for both these groups, to which Rick said they are working on this. There was a point in time when the majority of their buyers were owner-occupants. Right now a lot of the inventory they have requires cash. This is at the sellers’ discretion and something they do not control. This makes it difficult for owner-occupants to participate in a meaningful way.
A sister company called Auction Finance that provides bridge loans, which are lines of credit from $500,000 to $5 million, for residential property purchases in about nine states. They are priced similarly to hard money loans, although terms are probably a little more favorable. However, they are in the same general ballpark, although the terms are probably not any better than what an investor can get from the Norris Group, who does a fine job with hard money loans. They are trying to provide some financing and will be making some announcements shortly about some new financing options they will be promoting.
Bruce asked Rick if he sees the effect of hedge funds in his auction world as far as being a dominant buyer or presenting him with potentially a large amount of properties they want to exit. Rick said they have been selling to virtually every major hedge fund they can think of who has been participating in the single-family rental space. If you go down the list starting at the biggest, they are all buying from Auction.com. Some are turning around and starting to resell properties that may not fit their portfolio. They may have decided to exit a certain geography.
They have not seen any of the hedge funds start jettisoning large portfolios of properties. Rick knows people keep wandering when this will happen, although he is skeptical we are going to see it the way people believe it will happen. A lot of the hedge fund investment strategies look like long-term holds. You do not hold a real estate investment trust if you are going to turn the properties very quickly. You do not issue securities if you are going to dispose the properties quickly, and you do not go public if you are planning to sell off the property. He does not expect that we are going to see a lot of short term sales from the hedge funds, although ultimately you will start to see the properties be sold off in small chunks over time. Their areas of concentration have changed where they were in California and Phoenix, Arizona, then later they exited to Las Vegas and Atlanta because of pricing. Right now they are seeing the southeastern part of the country, especially Illinois and Indiana of all places. Indiana is emblematic of a long-term whole strategy since the investors they have talked to did not anticipate home price appreciation on the properties. They are looking at really good returns on rental, but also long-term holds.
Bruce asked if there was anything that surprised Rick in 2014, whether it was volume, price aggression, or lack of these things. Rick said he wished he could say he was surprised, although he was a little surprised at not seeing a little bit more new home building activity. However, he basically predicted this year would be flat and home price appreciation would slow down dramatically. Credit is tighter than he expected it to be this late in the year, although it was pretty easy to predict that credit was not going to be widely available to the average borrower. Rick said he is of the opinion that they are going to see homeownership rates dip a little bit before they finally settle down and start to come back.
For the next couple of years, there are just tremendous opportunities for rental property owners. The reason for this is their occupant ownership is declining. The last question would be if it is the new national intent to take the emphasis away from owning a home to occupying an affordable one. We will get into the whole scope of creating affordable rentals for people. Rick does not think we will get back to where we were back in the Great Depression era where homeownership rates were below 50%. We found out when we get to 70% homeownership rates, we have unfortunately put a lot of people into houses who really cannot afford them. We will probably settle in around 64-65% when it is all said and done. For the next few years, because of affordability, tight credit, and lack of inventory at the low end of the market, as well as psychological scarring among the millennials, there will likely be a heavier than average percentage of the population in rental properties.
We have never seen the set of charts that exist in California for anything like 2014 in years past. He will do a lot of research to figure out why, but one of the things for which there is not a chart is uncertainty. You are looking at whether or not you should own a home, and there is a whole generation that may look at that and say they are not sure. Rick said the Fannie Mae study that goes out and interviews people, specifically about if they want to become homeowners, showed that 75% of renters do eventually want to be homeowners but they delayed it. This percentage is down from about 83% a couple years ago. The aspiration is still there in large numbers, although it is still a little weaker than it used to be. What Rick thinks is a gating factor in younger potential homebuyers is issues with jobs. Forget about student loan debt for a minute, which makes affordability and qualifying for a loan a problem. The 25-35 year old age cohort really took a beating during the recession, and a lot of them are in jobs they really do not want to keep very long. You do not want a 30-year financial commitment if you do not want to commit to your job for more than the next ten months. The job market has a lot to do with the housing market and the delaying we are seeing in terms of home purchases.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Town and Country, Elite Auctions, In A Day Development, Inland Valley Association of Realtors, Investor Experts, Jennifer Buys Houses, Keystone CPA, Las Brisas Escrow, LA South REIA, Leivas Associates, Pilot Limousine, Primary Residential Mortgage, Northern California Real Estate Investors Association, North San Diego Real Estate Investors, Real Wealth Network, Realty 411 Magazine, Rick and LeAnne Rossiter, Personal Real Estate Magazine, SONOCA Corporation, Southpointe Companies, Spinnaker Loans, Tony Alvarez, and uDirect IRA Services, and the Council of Multiple Listing Services. See isurvivedrealestate.com for video of the live event and more on our sponsors.
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