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Switching Tracks: Shifting to the Online Auction

By, Krista Franks Brock

Editor's Note: This select print feature original appeared in the July 2016 issue of DS News.

With REO inventory down, bulk sales at the GSEs have reached the end of their line, and the agencies are shifting over to the far-reaching tracks of the online auction.

When the GSEs began to acquire a large inventory of REO properties as a result of the foreclosure crisis, they looked for new ways to quickly dispose of those properties, and one such method was the bulk sale. Fannie Mae and Freddie Mac began selling packages of REOs to investors and nonprofits in 2012. After relieving some of their inventory, the GSEs have largely abandoned their bulk sales of REO properties—though they do still engage in bulk sales of nonperforming loans. In place of bulk sales, the GSEs have been picking up activity with another platform: the online real estate auction.

The End of the Line for Bulk Sales 

Freddie Mac announced on its website that effective October 27, 2015, HomeSteps was discontinuing its InvestorSelect Bulk Sale program. However, the announcement did state, “Buyers are still encouraged to register as one of our Bulk Investors as we anticipate offering bulk sale opportunities for investors in the future.”

The announcement went on to direct interested investors to four auction companies HomeSteps uses to sell “select portions of our inventory.” Those companies include Auction.com, Hudson & Marshall, RealtyBid, and XOME.

The bulk sale seems to have gone somewhat quietly into the night without making many headlines—much in contrast to the way it debuted, with heavy anticipation and some resistance from some community groups.

When asked about the shift in strategy and whether auctions deliver diminished listing cycles and increased net proceeds on sales, a spokesperson for Freddie Mac said matter-of-factly, “Sales channels and sales options change from time to time based on our inventory and what is the best way to minimize losses and maximize returns for Freddie Mac.”

A Fannie Mae spokesperson was more direct in explaining that the current REO inventory at Fannie Mae is not ideal for bulk sales. “Declining REO volumes and lack of geographical concentration have diminished the need for bulk REO sales as a disposition channel,” Fannie Mae’s spokesperson said.

About 95 percent of Freddie Mac’s REOs are “sold through traditional channels with agents and brokers,” Freddie Mac’s spokesperson said. However, he explained that when a property has been on the market for a while, Freddie Mac will begin to “look for other disposition methods.”

One of those “other disposition methods” is the online real estate auction.

Like Freddie Mac, “Fannie Mae uses REO Auctions to market and sell some of our more challenging properties that appeal predominately to investor purchasers,” stated the spokesperson for Fannie Mae.

Exchanging Tracks

A recovering housing market with declining REO inventory, rising prices, and rising demand makes individual REO sales a more attractive disposition strategy. With fewer REO properties, there is not as much opportunity currently to pool properties based on geography. At the same time, online auctions simplify and often expedite the sales process with the potential to deliver better returns.

“In the past, many servicers offered REO assets within a pool structure based upon geographic location, condition, asset-type, etc. With a decline in supply and an increase in demand, the auction process has been proven to yield higher returns versus a traditional bulk/pool offering,” said Shawn Miller, director of business development at Hudson & Marshall.

“Offering assets on an individual basis versus a pool structure is proven to yield higher returns within an auction environment,” Miller said.

REO Sales Fueled by Auctions

Just as the market has changed over the past several years, the face of real estate auctions has also changed drastically, namely in that many auctions are not always taking place face-to-face.

Five or six years ago, it was common for auction companies to gather a couple hundred people in an auditorium over a weekend and sell a couple hundred REO properties—largely to investors—in live auction, according to Rick Sharga, chief marketing officer at Ten-X, formerly Auction.com.

Auction.com debuted its online real estate auction in 2008, and today many properties are sold through an e-Bay style auction with the entire transaction taking place online, according to Sharga.

“REO Auctions, especially online auctions, provide Fannie Mae with a platform to showcase our properties in front of a larger audience. The more competitive the auction, the better the outcome for Fannie Mae and the taxpayer,” Fannie Mae’s spokesperson told us.

In part, this is due to the fact that online auctions draw multiple offers and reach buyers across the globe. Sharga said Ten-X has had buyers from more than 100 countries bid on properties on its platform. About 50 percent of properties sold through Ten-X sell to buyers outside the state where the property is located. Ten-X had bidders from more than 100 properties bidding on its platform in the past year, according to Sharga.

“At least in theory, when doing an auction, you’re always going to get the best market price,” Sharga explained. “With multiple people bidding on the same property, you’re going to get the best available price, the price the market would really bare.”

Another benefit is that there is “date certainty” for the sale, both Sharga and Miller explained. There is no question about when the property will go to sale.

“If the auction is set for Tuesday, that’s when it will go for sale,” Sharga said. “Negotiation takes place live, in real time, online,” and 98 percent of the time the winning bid closes the deal.

Keeping the Door Open to Investors

With investors playing a major role in the REO market, it is important to note how any change in REO disposition might impact availability to investor buyers. Nonprofits aimed at helping communities and diminishing neighborhood blight are another important part of the REO market.

According to Fannie Mae’s spokesperson, “REO Auctions do not limit our ability to work with nonprofits or investor buyers on bulk sales. In fact, Fannie Mae has run both programs simultaneously for many years. While the number of investor bulk sales have diminished significantly over the last year, we continue to work closely with non-profits in a number of targeted areas.”

Of course, auction companies also understand the importance of working closely with investors in the REO market.

“Hudson & Marshall has a dedicated Investor Relations team which works with local, regional and national investor buyers to streamline the process from due diligence to closing,” Miller said.

Individual Buyers on Board

While investors have purchased large volumes of REOs since the foreclosure crisis, individual buyers also play a role in the REO market, and auction companies market to them as well.

“Our strategies leverage multiple marketing channels, including the retail residential brokerage model, to ensure that the seller’s assets have been exposed to all viable buyer demographics,” Miller said.

Ten-X has found success in partnering with agents and brokers to bring REOs to market.

In fact, Ten-X launched a short-term pilot program called Auction.com Select, which was aimed at allowing agents to bid on properties for their clients. The pilot offered a few hundred REO properties and experienced 100 percent sell through rate with 88 percent of the properties selling in three weeks at 96 percent of their list prices. Furthermore, two-thirds of the homes sold to traditional buyers and not investors.

“This is remarkable because historically, these types of properties sold at auction to investors,” Sharga explained.

Full Speed Ahead 

As the REO market continues to evolve, with auctions playing a bigger role, agents have opportunities to work alongside auctions and profit by aiding their clients in the auction process.

“Over the past couple years there has been more of a movement to working with auction companies for REOs, by themselves and alongside agents,” Sharga said.

Bank of America in particular offers a Dual Path program aimed at combining the efforts of agents and auction companies in REO sales. Often, an agent is assigned a property and is tasked with listing it on MLS and with an auction company. The auction company can make that property available to buyers across the globe, while the agent can leverage his or her local market expertise to stage the property, host open houses, and market the home to local owner-occupants.

Sharga said the dual path approach works well because “both entities are doing what they do best.”

Miller explained that Hudson & Marshall also often collaborates with real estate agents, and the outcomes are favorable. “A majority of our properties have engaged a listing agent for the entire duration of the auction process as well as compensation to participating selling brokers,” Miller said. “This is a win-win for all involved as it provides an additional marketing channel for the property, local buyers can visit the property on-site, the listing broker can leverage the auction process, and we can all work together to achieve the seller’s goals.”