Bruce Norris is joined this week by Rick Sharga. Rick is Executive Vice President for Auction.com. He is their chief spokesman on topics related to the U.S housing market, mortgage market, commercial real estate, and international real estate. The best way to introduce what he does comes from Auction.com president Jake Seid. He quoted,
“During his career Rick served as an expert commentator on the real estate industry and lead marketing efforts for Fortune 500 companies. His knowledge of and ability to speak hortatively about the trends that are driving our business will help to deepen the ways of understanding in which Auction.com can better serve the needs of commercial and residential buyers and sellers through our innovative online marketplace.”
The story behind Auction.com is an interesting one. Bruce had a friend who was a builder in Riverside who had a project that was pretty stubborn in selling. A brand new gentleman who was going to start an auction company got a shot to auction off his first pile of properties. He did it successfully, and thus was born Auction.com. Now there are 1,000 people working for the company. This has been percolating since back in 2007. They have offices in California, New York, Florida, Texas, and overseas. The company has been on a very significant growth trajectory. Bruce, who is very familiar with charts and has attended lots of auctions, said what is really interesting to him is that auctions typically disappear. Then, as soon as there is a downturn, the first bit of business they get is to sop up the leftover new construction tracks that did not sell. You then get into the REO world, then disappear for another six years in California and get into something else like probates.
This did not have happen with Auction.com. At the end of 1997 when everyone really had a big downturn, something really unique was they started doing land auctions at the time land was popular. Bruce thought this was a smart idea. More recently, they captured the trustee sale business. These are two things that were never messed with; most of the time land auctions were not even touched. Trustee sales were always conducted by local trustees. Somehow they have managed to capture a huge piece of these markets, and it is very unusual. Bruce asked what their secret is. Rick said one of the co-founders is fond of saying that back in the day they were the market maker for pieces of land that were difficult to sell. One of his favorite stories was they called a buyer who was purchasing a piece of land that was literally on the side of the mountain. It was very difficult to get to, so they called him to make sure he knew what he was buying. He said he knew exactly what he was buying because it turned out he was a paraglider and needed a place to launch.
Part of what has made the company unique and what is special about its DNA is you have two people who founded the company, Jeffrey and Rob Friedman, who did not come in with any pre-conceived notions about real estate auction business. They really have not been afraid to take chances or do things a little differently. One of the hesitations he had when he was first approached about joining the company was he did not want to have his next career choice be one that had a life-expectancy of 2-3 years while we went through the rest of the distressed inventory before it is all gone. Rick believes the company has an opportunity because of its history and its track record for doing non-traditional things to be a revolutionary force in the broader real estate market. Because of what they have been able to do online, it has become a sort of ebay for real estate. For Rick, this is pretty exciting and is an opportunity to take a lot of the friction and hassle out of the real estate process by leveraging online technology.
One thing you may contemplate when someone is auctioning off their property is that they are desperate. Historically, auctions is real estate have been one of two very divergent things. They were either super high-end luxury homes for which there were only a handful of perspective buyers across the country and one company that had a reputation for that market, or they were the scratch and dent inventory that nobody could sell or wanted. They have gradually been moving upstream and have been moving from land auctions to REO auctions.
As Bruce pointed out, they are now doing trustee sales in just about every state that does them. What they have done is opened up these sales to more and more potential buyers, and this has made for a much better process. Most recently they have moved into short sales, so they are actually working with one of the larger mortgage servicers in the country. They get market price validation on any short sale offers they get, and 60% of the time they wind up getting a higher bid online than what they were offered through their local realtor. They have been moving up the food chain from the most distressed to the less and less distressed assets. They are now selling Category A commercial assets, some of which are not distressed at all. It has been part of this migration, and as we move forward we will be able to carve out a small niche in the more traditional real estate market for people that do not have these pre-conceived notions.
Bruce said we should coin a phrase for the auction business since there is always a down market somewhere. What Rick is saying is really revolutionary. You do not need a down market, but maybe it is just going to be the best way to market. No other countries have really done this. You go to some countries, and it is the predominant way to sell a piece of real estate. In Australia and New Zealand, the majority of properties there are auctioned. They learned to trade in Australia once they decided to go down this path. They spent a month there talking to the companies who were running most of the real estate auctions to figure out how the process worked.
Historically, 10-20% of the residential real estate market has been done by For Sale by Owner homeowners. These numbers are from the National Association of Realtors, so you may have to take them with a grain of salt. They may actually be a little higher than what is being reported because they are survey numbers. However, if 10% of the residential market is For Sale by Owner, then that is $100 billion worth of transactions a year. If they were to just carve out 10% of that 10%, they would be a $10 billion a year company in terms of real estate sales.
One thing Bruce said they are trying to do is track interest and eyeballs. Rick’s company gradually does more and more and has a set of eyeballs already in place for the next property. He does not have to re-advertise for the next audience, and that is a big advantage. Rick said they get about 1.2 million visitors to their website every month and are one of the biggest advertisers on both Zillow and Trulia. They do a lot of local market advertising and direct marketing as well. Candidly, their value proposition is they can sell properties typically for more money and sell them more quickly. One of their secrets is they spend millions of dollars every year advertising properties. They figured one of the tricks to being a successful auction company is you cannot be tight with your marketing spending, and you have to have enough money to adequately promote the properties you are trying to sell.
When Bruce first ran into Auction.com, he interviewed one of the co-founders at the time. He was not real happy with how they were doing the auctions since they were bidding on behalf of the lender. They did say it in the brochure, but it was frustrating because somebody who has seen 400 houses really wants one of them to fall through the crack. This was not happening anymore. Bruce said if he was a lender/seller, he would be happier with the process. The same thing happened with trustee sales. He talked to his son Greg recently, who really is involved in the trustee sales every day. They have made dealing with Auction.com a lot easier because the auctions are basically once a week instead of five times a day. It has morphed into something where more people can attend, but it saves a lot of time as well. You also have to point out that at a lot of the auctions, coffee and donuts are provided.
When auctions happened back in the 90s, it was absolutely a ballroom you were ready to attend. When some of the companies put something together, it was almost like a wedding. When somebody won a bid, there was applause. This was part of why they got prices that they got because it was a happy place. People got happier than they intended to be and out did themselves. Bruce asked how this happens online. Rick said it is a paradox and an auction is the only process where the winner pays more for something they want to buy. They always tell people to have a number in mind when you start bidding and to not get carried away with the excitement.
There is a palpable excitement to it. Rick said he did not know if Bruce every bought anything on eBay, but as you get down to the closing seconds of an auction there is a frenzy of bidding activity. It is the same thing with real estate online. They see people waiting until the absolute last second. In order to make the bid and make sure everybody has a fair shot every time that happens, they extend the auction for a few minutes so that the previous high bidder has a chance. It is part in parcel of what goes on with an auction. They cannot ever completely replicate the excitement and energy that you get in a ballroom environment. However, they get pretty close to it online just by making sure people understand this is a live event and there are other bidders trying to bid them up.
Regarding bidding on behalf of the seller, this is part of what happens in 95% of the auctions out there that have a reserved price. Rick said they will bid up to the reserve amount, but once this reserve is hit they stop bidding. It actually serves a dual purpose in that it protects the seller, but it also protects bidders from thinking they will win something at a price that is significantly below what the reserve is. The reality is they are not going to get something at 50% of the reserve price. Bruce wondered if Auction.com has coat tails in the way. In other words, there will not be many REOs or builder closeouts, so normally the whole auction industry would go to sleep for the next six years. At the same, Auction.com is saying this is not their product. Bruce wondered if there are coat tails for the entire industry to now say there is an entire new thing of properties they can now pursue and actually do a good job.
Rick said even when they get back to normal levels of foreclosure activity, there are still about 500,000 homeowners who are in some stage of default every year. There are probably about 100,000 REOs. Last year they sold about 40,000 properties, so even if it were just carving out a bigger share of the distressed market, they could probably muddle along doing this. He thinks there is a much bigger opportunity as the next generation of buyers and sellers is already acclimated to buying and selling things online. They may even be more willing to do it with real estate. Whether or not they have coat tails really depends in part on how successful they are.
EBay and Amazon.com carved out huge niches for themselves in terms of online retail. You have not seen a whole lot of Amazon competitors or big eBay competitors, but there have been a lot of smaller entities who try to do the same things they do in specialty markets. Rick suspects if they are really successful in what they like to do, they will have people try to nip at their ankles as well.
Bruce has sat next to somebody in an auction, and he had seen every house. He went inside one in particular that the other guy started to bid on. Bruce turned to his page, and in four-inch letters across the sheet it listed fire damage. He was sitting next to the guy bidding and showed him the sheet and address, and he looked at Bruce through suspicious eyes and won the bid. It was a total piece of charcoal, and he never went into the place. When you have an auction online, you are dealing with somebody who is going to Google Earth to see the property. Bruce asked Rick how many times somebody buys something when there is no grace period in an auction.
Rick said with the commercial properties they typically have a massive amount of due diligence available online, including photos. They will try to have photos of whatever properties they are selling available, but they encourage bidders to view the property and that an agent has it available for open houses. If it is an REO, they will try to accommodate people getting in to look at the property. They will encourage people to see what they are bidding on and see if they happen to be bidding on something out of their geography. They will then try to work with somebody locally to be a set of eyes. Rick personally will never buy a piece of property that he had not seen inside. Some people are comfortable with this, but they typically try to encourage people to take a look first.
Trustee sale auctions are repetitively at a location and are physical auctions. A lot are available online now, so Bruce wondered what percentage are available online now versus a physical location. Numerically he would say 90% of the properties that they auction off are online. The trustee properties are marketed online, but because the state laws need to be executed in a physical location they will usually be held here. Bruce said he has noticed some hybrids of auction types, one of which is residential auctions. If he goes online and there is a residential auction, he might see a blended inventory of REOs, short sales, and even private owner properties.
Rick said they did sell a few hundred properties last year that were non-distressed, traditional residential properties. Rick said they are actually targeting a lot of Bruce’s students, although not individually but as categories. They are working with a lot of individual investors, many of whom have been buying from them over the years. They are now interested in testing the platform to resell the properties once they have rehabilitated or repaired them. Rick said they do let people sort by the type of property. If you only want to look at REOs, trustee sales, or short sales there are ways you can filter through the database to get to just those types of properties. Bruce noticed one auction where the title of it was Cloud on Title Auction. Rick jokingly said you look into the new world of messy record-keeping, and there are different ways you can express it. However, if they do see something where there may be a question about the titles, then they should disclose the information. Unfortunately, because of a lot of the things that went on during the real estate boom there are some messy paperwork issues that still need to be resolved.
MERS was in the middle of a lot of these issues, although a lot of the things involved transfers between banks and paperwork that got lost somewhere along the way. The industry really did not cover itself with glory over that decade. When you are auctioning off in California, you are typically doing a trustee sale. You could also do a judicial foreclosure in California, but most of the time this would be the norm in other states. Bruce asked if Florida is a state where this would be normal. Rick said it was funny Bruce mentioned Florida since they recently started doing online auctions of share/sale properties in Florida. The state began doing some small-scale versions of online share sales a couple years ago, although their provider was not having a great deal of success. They asked Rick’s company to come in and take a shot at it, and the preliminary results have been pretty spectacular. Rick thinks there may be an opportunity to move into some of those judicial states as well.
Rick also has a designation on the website referred to as the preferred agent network. There are listing agents and buyers agents, so Bruce wondered how they get to be a preferred agent. The fear is that we are going to intermediate the agent community, and they want to make it easy for people who would like to execute the transaction on their own. However, they do not really want to uninvited anybody from the party. Agents can sign up with them as listing agents and use them as a platform to sell their clients’ properties. Agents who are representing buyers need to have their buyer register them as an agent when they register on the site. This way when they buy something at one of the auctions the agent can qualify for a commission. They also have agents they work with in various locales who don’t do as much work as an agent typically does but manages a few houses and helps with the closing paperwork. Information for agents to sign up right on the website at Auction.com is available as well as an 800 number for them to call for more information.
If an investor wanted to put a property up for sale on the website, Bruce wondered what the upfront cost would be for advertising fees and commission. Rick said for the seller there is no charge. They do not charge the seller anything, and there are no upfront or advertising fees. They pick up the cost for advertising and marketing as well as handle the closing. In their model fees the buyer is premium, and all proceeds come out of this. For the seller, if they are not working with an agent there is absolutely no commission they are paying and no cost to doing the sale.
The last category Bruce paid attention to on the website was luxury homes. If he has a luxury home listing for $2,000, he can send it over to Auction.com and see what happens. If it does not cost him anything from his commission, then he gets exposure to whatever his world is. The thing he has to remember is if they do 8-year reserves, you are compelled to take that offer. There have been auction sites that have not required this, so it has been frustrating for buyers to deal with those bait and switch situations. A lot of it depends on the size of your property and whether or not they think it is a difficult piece of property to sell. This is the one exception where they may have an upfront marketing fee; but if the property does sell successfully it comes out of the proceeds.
The buyer premium is on top of the final bid, and it is important for people who are buying to understand this. Your final bid should probably be 95% of what you are actually willing to spend on the property. This is because there is a buyer premium on top of the final bid.
Check us out on our website at www.thenorrisgroup.com and be sure to tune in next week as Bruce continues his discussion with Rick Sharga. Check them out on their website at Auction.com, where you will find lots of information. Being in the hard money loan business, the Norris Group still gets loans from a source where somebody has bought something wholesale. Rick’s company has done a lot and expanded what they can do. For the skills he has, his company is a perfect match for him.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 500 podcasts in our free investor radio archive.