Few outside of his sphere know the name of Michael James “Jim” Deligatti, a true American pioneer and success story who passed away late last year at the age of 98. He was not known for a creation that improved mankind – at least, not exactly – but he did create something 50 years ago that became a global icon: the Big Mac.
Deligatti was a McDonald’s franchisee in the Pittsburgh area who wanted a menu item to compete with the signature double-decker offerings from competitors such as Bob’s Big Boy. He came up with the “meal on a bun” later dubbed the Big Mac, and within a year, it was on McDonald’s menus across the country. The company has since sold an estimated 400 billion Big Macs around the globe, with 1.5 million consumed each day in the U.S. alone.
Devotees will tell you that the sandwich’s success has less to do with the two all-beef patties and sesame seed buns than with what Deligatti called its “special sauce.” This recipe remains as closely guarded a secret as Coca Cola’s formula – and so far has eluded Wikileaks and even Russian hackers. Deligatti had a Big Mac at least once a week and lived to a very ripe old age, despite the 25,000 or more of the iconic burgers he claimed to have consumed over the years.
The takeaway here is twofold and obvious: 1) McDonald’s secret sauce had an extraordinarily positive effect on the company’s global success, and 2) the secret sauce apparently has the ability to prolong life, as anyone who consumed that many hamburgers would, under most circumstances, never have survived for almost a century.
There is a special sauce for mortgage servicers, too – and though it is not a secret, it is just starting to be fully appreciated. Online auctions are an ideal vehicle for servicers to use after they have made the decision to foreclose on a property. Although not guaranteed to prolong a servicer’s life, per se, using this technology can mean far better results in terms of time, costs and the overall bottom line.
Our firm, for instance, sold nearly 60,000 homes in 2016. The company is seeing industry trends that favor rapid disposition of properties and pricing that allows investors to make a profit by flipping a home or converting it into a rental unit.
Recently, more real estate owned (REO) properties are being put up for sale immediately after courthouse foreclosure sales in “as is” condition and sold via online auctions simply because technology makes it possible to move them quickly and avoid unnecessary eviction, repair and holding costs.
What follows are four compelling reasons why online auctions are becoming the secret sauce for servicers – and a standard item on their menus.
1) Reduced sales cycle times
REO sales cycles are slow – typically six to 12 months (longer in some states) – with lost revenues an unfortunate part of the formula. Holding costs, evictions, inspections, repairs, re-inspections, marketing costs and the cost of tying up capital that could otherwise be put to better use combine to make long servicer ownership periods extraordinarily expensive. Reducing the sales cycle by using auction technology to target interested investors much earlier may all but eliminate the negative financial impact of carrying costs for most REOs and reduce some of the human resource requirements for servicers, as well. By moving more properties more quickly, and reducing the amount of property management and property preservation tasks required, servicers can redeploy staff to do more strategically important work.
2) Speed to market benefits investors
Properties deteriorate quickly and deteriorate even more over time, despite the best efforts of servicers to keep them up. Even if the exteriors are maintained – something increasingly required by governmental entities to avoid penalties – the interiors can experience dramatic wear and tear. This happens not just because of time, but also because of squatters, thieves and vandals. Investors know these things, and they realize that if they can obtain REOs sooner rather than later, they can expect to save large amounts of money when it comes to making them fit to sell or rent. In addition, they can bring them to market sooner and begin seeing cashflow much more quickly. Both of these factor into the investor’s calculation of fair market value – less repair cost and faster time to market mean that an investor doesn’t need as large a “discount” in order to achieve a reasonable return on investment.
Online auctions offer ease, convenience and speed, which is a very attractive combination for both individual and institutional investors. And the development of mobile solutions allows investors to bid on and buy properties wherever they happen to be, using virtually any device.
Real estate transactions are increasingly moving online because that’s where the buyers start their search for investment properties. And the savvy investors know to look to online auction sites where they can find thousands of properties not listed on the local MLS – and to find investment opportunities beyond their local markets in other cities and states.
3) Neighborhoods stabilize more quickly
Any real estate appraiser will tell you that neighborhood condition is paramount when evaluating individual properties. Even a nice home suffers when surrounded by others in dodgy conditions. Foreclosure properties have a negative impact on the values of other homes in the neighborhood. And when these homes are left vacant through a long, drawn-out post-foreclosure process, they also become potential safety hazards. So, getting these properties back to pristine condition and stabilizing the neighborhood is of prime importance to everyone who lives there and the legislators and regulators who represent them.
Online auctions provide a high-speed disposition alternative for servicers. They move properties within days or weeks rather than months or even years, depending on the jurisdiction. Most investors spend money to rehabilitate REO properties in order to sell them at the highest price, or secure the highest-possible rent. In either case, a vacant property is removed from the neighborhood and replaced by a home in excellent condition, occupied by either a new homeowner or responsible renter in much less time. This compressed timeline benefits the servicer, the investor, the new buyer/renter and the neighborhood.
4) Renters are often already
There are few things worse for a family than losing a home to foreclosure. Everything changes, particularly for the children, and this brings pain and stress for the parents. When a family is forced to move, friendships cultivated over years are affected. It’s likely that children will have to attend different schools and will no longer be able to participate in familiar youth sports programs.
Additionally, families accustomed to the single-family-home lifestyle are likely to find themselves relegated to apartment complexes, with all of the accompanying changes and adjustments (starting with reduced living and storage space) they involve. So, even though a family finds itself in foreclosure, it is very likely its members are not eager to move if they can find a way to stay in place.
For investors, this means two things right off the bat. First, while the family is living in the home, and if they believe there’s a chance they can stay on as tenants after a foreclosure, they often maintain the property to the best of their ability, meaning that servicers and investors are less likely to deal with rampant property destruction. Second, there’s a chance for investors to put their capital to work almost immediately by converting the home into a rental unit, with the borrower staying in place as a renter.
Unlike most traditional real estate transactions, online auctions of REO properties often take place while the borrower or another tenant is still occupying the property. For the right investor, one who understands how to work through the details of this sort of situation, this is an ideal scenario: the opportunity to buy an investment home at a fair price and immediately turn it into a profitable cashflow property.
To recap, with their speed and ease of use, online auctions benefit multiple audiences. Servicers benefit by selling properties more quickly – often at a higher price – while simultaneously reducing holding costs. Investors benefit by having access to a broader number of properties than what’s typically available in a local market, being able to acquire the properties more quickly and easily and often being able to put their capital to work almost immediately. Distressed borrowers can benefit by retaining occupancy of the family home and minimizing disruption to their family. And the local community benefits by keeping neighborhoods more intact, safer and in better overall condition.
What’s involved in online auctions?
Like so many other things that can be done online in today’s world, auctions can appear to be deceptively simple. Build a website, import properties, set prices and start taking offers. Congratulations! You’re now the eBay of real estate! Easy, right? Not exactly. There’s a reason that none of McDonald’s competitors ever successfully cloned the Big Mac; and there’s a reason why online auctions require special skills and expertise.
Today, there are a number of companies providing online auction services. Servicers and REO managers need to do their due diligence before partnering with an online auction company to accelerate property disposition. There are a number of important questions to ask: Does the company have a successful track record? How many properties has it sold? Who are some of its other customers? How simple or complex is the process for uploading assets onto the auction site, and is there a well-trained staff available to provide as much assistance as needed? Can the partner provide guidance on property valuation, setting reserve pricing and auction strategy?
Servicers will want to select a partner with technology solutions that are sound, secure and user-friendly. With more and more online real estate traffic going mobile, the auction company should have a website built using responsive design technology (which allows the website to reconfigure itself to fit on whatever device the buyer is using), as well as apps that are native to popular iPad, iPhone and Android devices. As technology providers, online auction companies need to be able to provide the anywhere, anytime, any device solution that today’s investors demand.
It’s also critical that the auction provider aggressively market the properties to potential buyers in local, national and international markets. Billions of dollars are pouring into U.S. residential real estate from foreign investors looking for a safer alternative to other investment options. Online auctions that are supported by strong marketing can attract both national and international buyers and provide unprecedented exposure for a servicer’s REO assets.
Finally, servicers should look at what the buyer’s experience is when participating in the auction process, as the transaction will have an impact on their own brands, as well as that of the company executing the online auction. How easy is it for buyers to sign up for an account? To register for and bid in an auction? Is there a well-trained customer care team available to help guide buyers through the auction process itself and to overcome some of the obstacles that inevitably come up in REO transactions?
Online auctions are undeniably effective and are surprisingly easy for buyers to participate in. And, although they look simple, looks can sometimes be deceiving. There’s virtually no transaction more complex than a real estate sale, and the nature of REOs almost guarantees an even higher level of complexity. In order to provide the ease, speed and efficiency of property disposition to servicers and REO asset managers, online auction companies need to excel from an operational standpoint, be able to consistently and reliably execute, and make sure that everything they do meets their – and their clients’ – regulatory and legal compliance requirements. There’s a lot that goes into making this “special sauce.”
Although not everyone will necessarily remember Jim Deligatti’s name, most know his creation. His secret sauce led to a financial bonanza like few others in history, but it had to be adopted by McDonald’s system-wide. Will online auctions have a similar positive impact on the way servicers and REO managers conduct their businesses?
The way the mortgage industry deals with foreclosed properties has been permanently changed with the advent of online auctions – and for all the right reasons. It’s not just about doing more with less as a servicer; it’s not even just about achieving better financial results. In the larger picture, online auctions offer a means to do those things, but they also represent a meaningful opportunity to create a healthier housing market, both for those who rent and for those who buy. That is what happens when you can attract capital to places where it can do the most good – and not just for the investors. Online auctions enable investment and are a catalyst for real and immediate positive change in the nation’s critically important housing industry.
Rick Sharga is executive vice president of Auction.com, an online real estate marketplace serving major financial institutions, institutional investors, individual consumers and real estate professionals. He can be reached at email@example.com.