THE REAL ESTATE CRISIS IN KC THE HOME AUCTION BUSINESS THRIVES IN A DOWN MARKET PG. 44

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1 MAKE $$$ IN A BEAR MARKET 9 TIPS TO BECOME AN ACTIVIST INVESTOR PORSCHE 911 STILL RULES K C B U S I N E S S KCBcentral.com THE REAL ESTATE CRISIS IN KC JUNE 2008 $4.95 MARINER WEALTH S $5 BILLION INVESTMENT POOL & 4 COOL PLACES TO OFFICE THE HOME AUCTION BUSINESS THRIVES IN A DOWN MARKET PG. 44 CHALLENGES TO REALTORS 6 PERCENT COMMISSIONS PG. 31

2 44 Homes on the Auction Block Auctions are growing in popularity as a way to unload properties quickly and, sometimes, reap attractive returns. While it remains the primary method of selling distressed properties, auctions are gaining traction in the mainstream real estate sector, as well. Demand is growing for KC home auction businesses. STORY BY DAVID CONRADS PHOTOS BY ALISTAIR TUTTON 6 K C B U S I N E S S

3 44 K C B U S I N E S S CLOCKWISE FROM TOP LEFT: A WILLIAMS & WIL- LIAMS SIGN IN FRONT OF A HOUSE ON COLLEGE ST. IN KANSAS CITY ON AUCTION DAY; AUCTION ACTION INSIDE A HOUSE IN BATES CITY; CORY PIETRUS, HIGH BIDDER ON TWO PROPERTIES AT A WILLIAMS & WILLIAMS AUCTION; NEIL ORTH OF WILLIAMS & WILLIAMS HANDS OUT BIDDING NUMBERS.

4 Homes on the Auction Block Story by DAVID CONRADS Photos by ALISTAIR TUTTON TOM WINSOR AND HIS WIFE, PATRICIA, GOT SOME SOBERING ADVICE IN 2006 WHEN THEY DECIDED TO SELL their 4,200-square-foot, four-bedroom, four-and-a-half-bath, all-stucco house in Lee s Summit s toney Summit Falls subdivision. Be patient, they were told by a number of agents and real estate professionals, and brace yourselves for a prolonged listing period. When Tom learned that only nine houses of similar size to his had sold in all of Jackson County during the previous year, he started to think about the sale in a different way. People in the upper echelon sometimes don t want a used house. They want a new one, he says. The people I talked to said it could be a year and a half before they could turn it. Instead of listing his house with a real estate agent and trying to sell it in the conventional way, Winsor opted to forgo the potentially long and uncertain wait and sold his house at auction. After talking with several auction companies specializing in real estate, he signed on with Cates Auction and Realty Company. Winsor specifically did not want an auction conducted in his yard, and Cates already had a ballroom-style auction scheduled for the fall. Six weeks after Winsor signed the contract, Jeff Cates gavel came down before a crowd of about 300 at the Westin Hotel at Crown Center, and Winsor s house sold for $484,000. It was one of 19 high-end properties offered that night that resulted in more than $5.5 million in sales. The transaction closed within the month. While the final sale price for Winsor s house was about $25,000 less than he had hoped for, he was very satisfied with the outcome. We had hoped to get a little more for the house, but you have to weigh that with the fact that we really had no idea how much we would have gotten selling it the other way, he says. We figured that auctioning it allowed us to get on with our lives almost two years earlier than listing it. The housing market was soft at the time. Had we listed it, we would have ended up selling in an even more depressed market. I N S I G H T, I N N O V A T I O N, I N S P I R A T I O N 45

5 Real estate auctions are largely associated with distressed properties foreclosures, bankruptcies and property owners in dire financial straits and as a selling method of last resort. Auctions have long been a useful way for banks to unload foreclosed property quickly. But more homeowners, like the Winsors, are turning to the auction method for selling real estate that is not distressed. According to the National Auctioneers Association (NAA), the live auction industry grew by 5.3 percent in Of the 12 categories the organization tracks (everything from art and antiques to farm machinery and livestock), the three fastest-growing segments since 2003 have been in real estate. Residential real estate grew the fastest between 2003 and 2007 at a 46.6 percent clip. With the housing market so weak that at least one real estate agent in Kansas City is offering bus tours of foreclosed properties, the climate for the growth of real estate auctions would appear to be ideal. And there is no doubt that the surplus of homes for sale and long listing periods have inspired many homeowners to look to alternative methods of turning their properties. But according to Chris Longly, NAA s public affairs manager, the downturn in the housing market has contributed only modestly to the overall growth in the industry, which has been fast and steady, beginning well before the current crisis. Longly says, More and more consumers are looking to auction as a viable option when selling their property. Auctions are fast. They re convenient. And they minimize the holding costs that people are incurring now. Steve Murray, a real estate industry THIS PAGE: A THREE-BEDROOM HOUSE ON BLUE HILLS ROAD WAS AUCTIONED WITH FIVE OTHER PROPERTIES; INSIDE THE UNFINISHED HOME. OPPOSITE PAGE: BRUCE BROOKS AUCTIONS THE PROPERTY; TERRANCE JONES WAS THE HIGH BIDDER ON A PROSPECT AVENUE PROPERTY AUCTIONED AT THE HOME SITE. analyst and consultant, notes that in addition to selling distressed properties, the auction method has been used by builders and developers as an attention-getting device to stoke interest in a new project or to sell the last remaining units (as was done a few years ago by the developers of the Western Auto Lofts in downtown Kansas City). One of the best ways to market a property is to say you re going to auction it, because everyone thinks they can get a deal, Murray said in a telephone interview from his office in Littleton, Colorado. Up until the last year or two, it has been very uncommon for owners of regular, suburban-type homes to use the auction system to sell the houses. In terms of total percentages of the systems people use to sell their homes, it s still a very, very small share of housing sales. But it is a growing area. He said it s unfortunate that many Americans have negative connotations of real estate auctions, noting that selling homes at auction is the norm in Australia and South Africa. Personally, I think it s a very efficient method and fits a lot of people well, he says. Auctions offer homeowners a number of advantages over conventional listings. In addition to the overall speed of the process, an auction allows sellers to time the sale. This is important for homeowners who need to know exactly when they will have the proceeds in hand, who can t face the uncertainty of not knowing when the sale will go through or who want to avoid the holding costs associated with owning two houses. A real estate auction tells you exactly what a property is worth at that particular point in time, says Tommy Williams, founder and chairman of Tulsa, Oklahoma-based real estate auction company Williams & Williams and a forty-five-year veteran of the business. Williams also notes that when a group of willing buyers gathers at a live auction, a competitive drive kicks in, and some get caught up in the heat of the moment, driving the bid higher. It s not unusual for a property to bring more than what it would bring in a traditional sale, Williams says. It s just that it s going to bring what the public says it s worth. That s the free marketplace speaking. It s capitalism in action. Jeff Cates, president of Cates Auction and Realty Company, which handled the sale of Winsor s house, is of the same mind. Market value is determined by what a buyer is willing 46 K C B U S I N E S S

6 to pay, he says You can look at past comparable sales all day, but the reality is, they don t reflect today s market. It s past information. The key to a successful real estate auction is marketing. One of the misconceptions of the business is that the auctioneer s job is primarily to talk fast. Cates estimates that about 95 percent of his company s work is marketing a property, and only five percent of the process is the auction itself. Accelerating the sale process to about 45 days necessitates an intensive marketing campaign during the month preceding the sale. For Cates, a family-owned business operating in Kansas City since 1942, the marketing efforts include the design and production of a four-color brochure and newspaper ads, internet listings on the company s Web site (as well as through Multiple Listing Service, Realtor.com and others), direct mail based on targeted demographics, blasts to thousands of area realtors and targeted recipients, press releases, telemarketing, open houses and signs at the property and on feeder streets. Signs are still a very important part of the marketing process, Cates says. Even with the Internet and technology, we ve still found the number one way people find our properties [is] through signs. Cates estimates his company spends about 1 or 2 percent of a property s value on marketing. Cates employees also prepare a complete due diligence package for potential buyers, including a preliminary title commitment, plat maps, surveys and appraisals (if available), seller s disclosures, a purchase and sale agreement and home warranty information. Proponents of the auction method point to another advantage: If an auction is not successful in turning a property (either because it doesn t meet the seller s reserve or for other reasons) interested buyers are identified from those who have registered to bid. In many cases, a non-auction sale can be worked out. United Country, a Kansas City-based real estate franchise company that specializes in rural property, is exploiting the possibilities of combining the auction method with traditional sales something the company calls the blended method. Even if a property doesn t sell, it stimulates interest so you can initiate a contract in a shorter period of time usually within a few weeks, says Mike Jones, a veteran auctioneer who was brought in last year to head up United Country s new auction division. United Country s auction sales for 2007 exceeded projections, and the company is expecting to do between $325 and $350 million in auction business in 2008 triple the sales of Jones says he believes United Country is the first national franchise to recognize the value of the blended method and take it to the marketplace. According to Jones, the blended method offers a number of advantages. He points out that at the conclusion of an auction, many of those who were not high bidders are still in the market for a house. That s an opportunity to interest them in another auction property or a property listed in the conventional way, getting auctioneers and traditional sales agents working together. He also sees the auction method itself capturing a greater and greater share of the real estate sales market, particularly as the public sees more high-end property, trophy houses and celebrity cribs sold at auction. Like others in the industry, Jones gives a small measure of credit to ebay and its former CEO, Meg Whitman, for benefiting the real estate auction business. Jones says he was initially fearful of the online auction Web site coming into the marketplace. Now, he credits it with making the public more familiar with the auction concept and the bidding process and for presenting auctions in a positive context. EBay has made the word auction acceptable, he says. It s helped the live auction market tremendously. I N S I G H T, I N N O V A T I O N, I N S P I R A T I O N 47