Tuesday, March 12, 2013

The Online Auction Process: The New Frontier for Real Estate Investors


It's a simple concept found everywhere --- volume purchases equal volume discounts.  And, during the last recessionary cycle, both GSEs and investors learned to leverage the concept to their advantage. Fannie and Freddie's pilot "REO to Rentals" program that moved thousands of distressed assets off their books through bulk sales to investors captured industry headlines in 2012. Other examples include savvy private equity firms with deep pockets sweeping up multiple foreclosures at bargain prices at courthouse auctions, as well as the FHA employing the same strategy to shed underperforming notes in bulk deals. We’re seeing that a previously underpublicized conduit for disposing of distressed assets is gaining traction among both lenders and private investors as a way of moving distressed assets in volume --- the online auction process. It comes along at a great time to continue housing’s forward momentum.

Along with other industry watchers over the past few years, I’ve been following the progress of the “shadow inventory” comprised of increasing delinquencies, rising foreclosures, and REO. Today, year- over-year mortgage delinquencies have fallen. Short sales, loan workouts, and new state laws are slowing the flow of distressed assets into the foreclosure pipeline.  The all-cash investor has emerged as the white knight rescuing lenders and servicers from their toxic REO problem. The online auction process currently serves to connect volume REO sellers and qualified volume buyers in an efficient manner to dispose of distressed assets. The auction process has shown itself indispensable in removing huge blocks of extremely nonperforming REO from lender and servicer balance sheets at steep discounts, and the online auctioneer is carving out a special niche as a new type of servicing agent to the housing industry.  As a result, sellers win by disposing of assets, and a new type of servicer solidifies its presence in the industry. But most of all, private investors have found a new way to participate in the market. Government -run bulk sales programs carried with them the expected baggage and inefficient red tape that is ultimately less-profitable to investors. Acquiring bulk assets through the auction process allows investors a faster return on their money as they can get property to market more quickly to either generate rental revenue, or flip faster for sale to take advantage of our current environment of rising equity and tight supply.

Some real estate analysts and professionals have argued investor participation at the bulk level could be counterproductive to nurturing a fully-balanced and healthy housing climate. It’s no secret that the current rise in home values is directly related to low supply of available homes for sale. The REO inventory currently moving through the online auction conduit could possibly modulate appreciation in select markets by preventing abnormal price spikes and keeping values at more affordable levels if sold on the open market. This argument doesn’t take into consideration three important factors. First, scarce inventory is mainly the result of existing homeowners still sitting on the sidelines waiting for the right moment to sell.  Second, much of the REO inventory sold via the auction channel requires substantial work to get it to market standards, and investors can leverage the capital necessary to do so. Third, many investors are following a “rent and hold” strategy with acquired properties, which fills a very important gap in housing by creating affordable single family homes rentals.

Recently, through our escrow services, we have been actively involved in the auction process by facilitating some of the back-office administration and closings for hundreds of bulk transactions. We are optimistic that the quiet yet positive impact it is having on the industry will continue to mate investors with opportunities, continue to deplete distressed inventory, and ultimately facilitate new sources of affordable housing.

1 comment:

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