Aaron and Bruce Norris are joined again this week by Randy Grigg and Mike Grigg with Elite Auctions. They continue their discussion from last week about the auction strategy and how it has changed over time. Today they will get more into how it changes when you are in a different quadrant in California.
- What was the bust market like, and how did sellers respond?
- Do auction companies target the retail market?
- Did changes in technology also change the auction business?
- Does Elite Auctions see the auction business as a tool to find wholesale deals or retail?
- What kind of markets should you expect to see in Quadrants 3 and 4?
- What is the current market like in Bakersfield?
- How has financing changed since the boom in 2005?
This radio show began with them discussing the bust market from 2007-2011. Aaron asked if these conversations were fun to have with sellers, which Mike said these were bad memories. Bruce said there was an auction they attempted to do in Moreno Valley with maxed out homes. However, Randy said they could not get the number to go. The first auction they did in Riverside was really good and, before the bust, they had full confidence going into it that it would bring a good price. Now it is a matter of whether or not the seller will like it. Even in that crazy market, sellers had unrealistic expectations on their home prices. They thought their house was worth $1 million, and it would get to $850 while the rest of the houses in the neighborhood were selling for $780. They did not want to take this bid.
Mike said in all the quadrants you are going to have unrealistic expectations. He feels the sellers are always 6 months to a year behind in what the reality of the market is in their mindset. In California, that is a rough six months. With the way it was changing, it was going down 3% a month. This was one of those auctions where everything was done right, the market was just so fearful for people and they could not say yes to the answer that came about. It was probably the right answer, they just could not give it to them.
Randy and Mike helped sell Bruce’s commercial building in 2007, which was a really important sale. He knew it was going to take a hit since it was not the best location. He wanted to go hide somewhere then come back and end up here. This worked out extremely well. He could not sell the building in the MLS and was not getting anything for it. Nobody could find it since it was in a hidden location.
There were definitely some success stories. Bruce remembered in one of his boot camps he was teaching and could not be at a sale. He asked Mike and Randy if the sale started with a one since he was fearful it was going to be less than $100. It was on a weird street in Pomona, but they still had a lot of people come. When they told Bruce it started with a 2, he was shocked. In any market and at any time an auction can do this and surprise you. Mike thinks a lot of sellers go into it expecting theirs to be that one, and it is not reality. One in 20 auctions goes haywire and you do not know why; it just does this. If you hit the market at the exact right time and with the exact right buyers in it, then it just works. The only house that sold in the auction they did was the as-is house. It was a 3,000 square foot house, and Rick Solis happened to find it. They put it in the system, and it mad $100 grand and made up for the mistake.
Aaron asked if most auction companies specifically try to target the retail market. Mike said most auction companies in California do not deal with the retail market at all except on the buyer’s side because part of it is an ongoing marketing strategy. The marketing company ends up with a list of people who want to buy properties, and it would be easier to take the same list and keep reusing it rather than going after a new retail market every time. Most auction companies do not do this, at least not in California. When you start moving into other parts of the country where auctions are a very relevant and normal way to sell, then they are sold the auction way. This is the case with ranch properties and small farms. Their paper has an auction section, which Randy and Mike’s newspaper did not have. It is a more relevant way to sell, and people are used to it. They understand it and buy a lot of different products that way in that part of the country. It is not so much the case out here.
Bruce said one of the best buys he ever got was an auction in the LA Times. They had a whole page on auctions that would sometimes spill over to two. It was really tiny writing, and Bruce had to look really carefully because every once in a while there was some real estate in there. Bruce knew if it was on that page, the person was usually not auctioning real estate since they did not know what they were doing. When you see a poorly marketed auction, then go for it. Bruce would get excited when he saw these. Randy remembered Bruce going house to house and buying them all. There were five new builds, and they originally denied they even had an ad in the LA Times. Bruce had to convince them they did in fact advertise an auction.
When he first showed up, there was no for sale sign and they said they had two bedrooms when in fact they had three. They had a $25,000 minimum deposit for a $120 grand house, and there was no way they were marketing it to an owner-occupant. Randy remembered a couple other people there who were not strong bidders, one who tried to get him a couple times. Bruce bought from someone who had a track of model homes he was starting, and a year later he bought his out. He called Bruce out of the blue telling him he had a chance to buy many lots and needed to sell. He did not call Bruce because he had seen him at the auction, but it happened that he recognized him when they went into escrow. He just let them go at half price so he could get to the land.
Aaron thought they would have been very busy during the bust, but with what Randy and Mike said Aaron wondered if technology changed or people were so unrealistic they were not ready. Randy and Mike were not sure, but they did remember buying 50 REOs. Using the auction, they flipped all of them. A lot of them were bought at RADC, which is now Auction.com. This is why they like to call themselves, Elite Auctions, a retail auction company while RADC at the time was a wholesale auction company. They would buy from the wholesale auction company, fix it up, and sell it with the retail auction company. They were their best clients, and they would sell 3-4 at a time because of the marketing costs.
They would do them all at the house, but they never did them all together. They would go house to house to house. They could be there at 10 am, then 12 pm, then 2:00, then 4:00. Aaron asked them where they would usually have them stand, which they said was usually outside in the front. If it were a beach front property, you would put them where they can see the beach. They were busy during the down period because they were flipping them even in a bad market.
They received a lot of calls to do auctions, but the sellers were not qualified. They denied quite a few people since they had learned by that point that they were done doing practice auctions. If it was not a good deal, they passed on it. It was too much work to get to that 30 days later after open houses and marketing. This included traveling too, so you did not want to get to the day and not have a sale. If they missed the mark, they were honest and said they missed it on that one but did hit the comp number most of the time. If the seller does not take it, then that leads to disappointment. It was an emotional roller coaster for them, so they decided to sell their own things at auction since they like doing them. 80% of the houses they sold were theirs. They sold for Bruce as well as some other people.
Around the time RADC became Auction.com, Aaron asked if technology was changing quickly and changed the business. Mike and Randy said yes and that they would rent out a whole convention center where there could be 500-1,000 people. You could have 1,500 people bidding on a lot of properties. There could be 500 houses and 500 people, one bidder per house. This is where a lot of running the bid would happen because they had to have it and did not have the support. They went from having that to completely online. They do not do live auctions anymore unless it is a unique property. They have captured the trustee sale business too and done a really good job with it.
When Bruce spoke in San Diego, they talked about counties and cities starting to do it online because of tech sales. They had foreign bidders, 13 countries, 30 states. It was no longer a local auction. In Kern County, they have been doing online sales for a long time. They said it was so successful that this is how companies are doing it now. The overhead is not there; you just list it online. So why would you rent out a convention center and bring staff if this is not necessary?
Aaron said the papers are hurting so much that he is surprised that in the trustee sale process the costs have gone up to 2% of the sale price. The paper has gotten a lot more expensive and a lot less effective. Aaron asked if we have to stop marketing and having the expectation of advertising in papers. Mike said now while Bruce said he does not think anyone would be too concerned about that since people don’t really do this anymore. Not that many years ago this was an effective tool, but it sounds crazy now. Even when people say the word newspaper you question it. Randy said there are old people like him who still read the paper. He always says a nice display ad in the paper near the front can still catch people’s eye, especially the older people and kids wanting to buy a house. He recommends still using display ads, even if they are not a full page.
Bruce asked if they see the auction business as a tool to still find wholesale deals or retail. Randy said he could not really answer this since he had not really been a buyer. He said he would attend the land auctions that Williams and Williams and bought a lot from Hudson and Marshall. There would be 3 or 4 people at the auctions, and they would be the winning bidder. Williams and Williams was really good about letting them come back with a better offer if the first could not be accepted. Very few times did they not accept something.
Aaron asked what auction company would keep calling back trying to renegotiate the sale price after the sale had happened. The Norris Group sent out a press release telling investors not to do it since they knew they were bluffing. It is the wrong precedent to set. Bruce had talked to Greg about this. They had been the winning bidder on 4 or 5 houses, and they were trying to renegotiate after the fact. Bruce said you cannot do this because they will enter something into a computer and not follow through on it. Mike said it happened to him and Randy where people would tell them they were $5,000 away from where they needed to be and asked them if they could make it happen. Randy and Mike would say no and move on to the next person. The next day they would call and say they got someone to accept it, to which Randy and Mike just laughed.
Hudson and Marshall had their own auctions, and Randy and Mike bought 3-4 from them. When they looked at how many people were bidding they thought they had a chance and ended up getting all three. They didn’t care what the properties looked like as long as it was a property.
Going into Quadrant 3, this is a recovery mood time period where we have hit the bottom and are flattening out. This occurred in 2012 and was the last time Mike and Randy did an auction for an investor client. Aaron asked what changed around that time, which Mike said it was them. An auction works in any market, but Mike said Randy had to do all the work. He had to deal with all these buyers and sellers. Mike would sit quietly and do the marketing on the side. They discussed how much work it was for little money, and they were both getting burned out by it. They had another partner, Connie, and they all decided to go into the charity auction business. They were not burned out by the auction process itself, but it was exhausting. It is exhausting to do all this work, get to a good price, and have a seller say no. It is a lot different than if you have a listing and get an offer that gets denied. With this, you can just go to the next person.
Aaron said in this market it may be a little more exciting on the retail side. The conversation with the sellers may not be as bad and they may be more realistic. When they had Tommy Williams as a speaker the first couple years at I Survived Real Estate, he was a big advocate of short sale auctions. He did not understand why during the downturn people were not doing short sale auctions and using the auction method to get rid of that process sooner instead of having to go through the REO process. Aaron was surprised that this never really picked up steam.
Bruce said this is a short phase, so following Quadrant 3 is the boom market is Quadrant 4. This quadrant occurs from 2013 to now. Aaron asked them what they are seeing in the auction industry and how it has changed from the last boom. Mike said technology is a big one. The auctions you see now are primarily done online in the auction business. There are old hat auctioneers working with their children now telling their parents to shift the gears and how they can bring in buyers from Europe. Before they only had a small radius of people who could attend their auctions. These old hat auctioneers have let their kids prove to them how it works, and it is success story after success story.
With a retail auction, those people need more hand holding since they will be moving in and have never purchased a house. Mike still thinks a live auction on the lawn would work here. Aaron asked if realtors are more accepting in the process and willing to participate, which they said no and it would not be any different than it was. They put in a commission, which most of the auction companies back then did not do. They had 74 people at one of their Arcadia auctions, and they had to bring $40,000 just to be a bidder. They ended up getting $3 million in cashier’s checks. This was the biggest crowd they ever had with a single-family house on the lawn.
Bidders usually come in twos and threes, so with 74 multiplied by 2 you had about 150 people in your backyard. The seller was a realtor who had installed a new wooden floor, so he did not want anybody going inside and walking on it. If they wanted to look inside, they had to wear either socks or special booties. They would do an auction like this themselves if they received the right call. They still receive calls, but they said it better be a slam dunk if they are going to act on it at this point. They are not out of the real estate business, they are just at the point where they will do it if it is a slam dunk deal.
Aaron has been following the auction industry since he came on board in 2005, and the list has changed by half. Once upon a time the National Association of Realtors was putting out the auction MLS. They are not doing this anymore, and a lot of companies have merged. Aaron asked if they are still involved with the associations and what talk is going on in the auction industry. Mike said they are and that they list a sell a lot now. They are listing and selling things they bought and held for investors 4-5 years ago. They are not doing it by auction, but by list and sell. If they own the property and do not want to do it, Mike and Randy have to do what they say.
Right now the market in Bakersfield is really hot, especially between 150 and 250. If they are nice, you will get multiple offers. They just did a highest and best on the last one they sold and had so many offers on it in just a 2 day period. As investors, it is hard to find things to flip in Bakersfield since there is so much activity in that price range. Bruce asked where you would go in the auction world if you were looking for a deal. Mike said if you could find those individual houses sold on the grass with an out-of-state-company, then it would be beneficial. Randy said he would go all day long to those auctions. Any time they had one, he would be there.
Bruce also talked about out-of-product type. You could have an auction company that really auctions businesses that are out of business as well as restaurants, then somebody they know says they have a house. This is really ideal. 9 times out of 10 you will steal this. Mike likes the odds of an out-of-state company doing 2-3 houses in the area. They made their bread and butter during this time buying houses this way.
Aaron mentioned how financing had really changed from the boom in 2005 as a result of Dodd-Frank. This changed the crowd’s assurance that they could finance what they were bidding on, and now you have a much more educated buyer. They know the drill they will go through; and if they are hesitant, they are probably not bidding. At the auction, you are leaving it at a positive risk. An auction was great because when you got a sale, there was a healthy deposit that was forfeited if it did not close.
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