Jan. 28 (Bloomberg) -- With a sharp nod, Robert Parkin bids
$500,000 at the auction of a brick colonial house in Upper
Marlboro, Maryland, that the builder once valued at $1.1 million.
Seconds later, a competitor counters at $510,000, and Parkin
must decide whether to raise his limit on the unfinished, 4,878-
square-foot property with a stop-work order taped to the window.
This auction, 19 miles (30.6 kilometers) southeast of
Washington, is one of hundreds a day carried out on front lawns
and in hotel ballrooms nationwide by liquidators such as Williams
& Williams Marketing Services Inc. of Tulsa, Oklahoma. With 2.3
million residences in foreclosure, the sales are pushing down
prices to early 2004 levels in the hunt for new buyers.
“If you’re looking for expediency to get people back in
homes, un-board neighborhoods, clean up the rats, this is it,”
says Pamela McKissick, 62, the president of closely held Williams
& Williams. Banks, brokerages and government-sponsored mortgage
finance companies such as Fannie Mae hire the company to sell
houses one at a time or to liquidate entire portfolios.
Auctions are resetting real estate values at the
neighborhood level, while President Barack Obama tries to find a
way to limit foreclosures and revitalize the worst housing market
since the Great Depression. Bargain hunters such as Parkin, a 50-
year-old aerospace engineer who is shopping for a personal
residence, and mom-and-pop investors on the prowl for rental
properties, aren’t waiting for federal aid.
They are buying foreclosed properties for as little as 10
cents on the dollar. Lenders seized 9,787 houses a day in
December, or almost seven a minute. Even after the 26 percent
drop in residential prices since June 2007, there are enough
unsold homes to last 9.3 months at the current sales rate.
Falling Prices
Housing values may decline a further 15.5 percent this year,
based on December 2009 contracts tied to the RPX residential real
estate index. The RPX, developed by New York-based Radar Logic
Inc., measures the average price per square foot of residential
sales in 25 U.S. markets.
After median house prices fell 15 percent in November, the
most on record, home sales rebounded 6.5 percent last month, the
National Association of Realtors said Jan. 26. Distressed sales
accounted for almost half the total.
The California Association of Realtors said yesterday that
the price of a single-family house in the state plunged 41.5
percent last year. The Commerce Department may report tomorrow
that new-home sales fell 2.5 percent last month, based on a
Bloomberg survey of 69 economists.
Barroom Brawler
Auctions are the best way to determine the true value of
real estate, says Dean Williams, 47, the owner of the auction
house that bears his name. Sales through agents promote the
owners’ asking prices, while lenders emphasize the affordability
of monthly payments, he says, during an interview in Tulsa,
surrounded by shelves of books including “Intellectual Freedom
Fighter” and “Radicals for Capitalism.” His lip is scarred
from a bar-room brawl 28 years ago.
“We’re creating values beyond just short-term profit,” he
says. “Those values, we feel, are efficiency, transparency,
competition, stewardship.”
During the last real estate recession in the early 1990s,
brought on by the collapse of the savings and loan industry, a
temporary federal agency, the Resolution Trust Corp., served as a
central clearing house to dispose of foreclosed houses, offices
and stores. No such authority exists now, leaving private buyers
and sellers to work out their own deals.
‘Greedy Speculators’
Forced sales reduce previously recorded property values and
erode the $391 billion in local governments’ property tax rolls.
Auctions exacerbate the crisis, says Ira Rheingold, executive
director of the National Association of Consumer Advocates, a
nonprofit attorneys group in Washington.
“They are just furthering the depressed market, because
what they are doing is selling properties really, really cheap,”
Rheingold says. “I don’t know that it does anything for the
market except make some greedy speculators rich.”
Lawrence Summers, Obama’s director of the National Economic
Council, pledged in a Jan. 15 letter to congressional leaders
that the administration will commit $50 billion to $100 billion
to try to keep people in their homes. While government assistance
may slow the record pace of foreclosures, it won’t stop them.
“I’m anticipating that we’re going to see a frightening
increase in foreclosure activity in the first part of the year,”
says Rick Sharga, a senior vice president at the RealtyTrac real
estate data service in Irvine, California. “Everybody
underestimated just how severe this would be.”
Williams & Williams says it aims to triple its peak sales to
10,000 houses a month this year. In 2008, the company says it
generated $1.1 billion in revenue on 13,872 auctions.
Internet Bidders
About 14 percent of the transactions are won by bidders on
the Internet, and the Williams & Williams switchboard receives
30,000 calls a month, the company says. Its commissions average 6
percent. Auctioneers themselves can earn as much as $1 million a
year.
Williams, who bought the business from his father, Tommy, in
2003, bankrolled the December introduction of an affiliated
broadcast venture, the Auction Network, in 87 million households
and on the Internet. Auction Network sells everything from
antiques to condominiums and is developing a niche marketing the
personal effects of celebrities such as Ozzy Osbourne, the late
comedian Bob Hope and silent film actors Mary Pickford and
Douglas Fairbanks Jr.
While a team of Williams & Williams auctioneers was moving
through Maryland and Virginia on Dec. 16, a competitor, Irvine,
California-based Real Estate Disposition Corp., was wrapping up
an eight-day, 18-city tour at which it sold 2,842 homes for $210
million, according to Chairman Robert Friedman.
Swap-meet Partners
Friedman and Chief Executive Officer Jeffrey Frieden, both
47, met as teenagers when they were working at a swap meet. They
started privately owned REDC in 1990 to help dispose of
properties left by the S&L bust. They auctioned distressed real
estate for seven years before mothballing the practice. Two years
ago, they started again.
In November, the Trident IV private equity fund managed by
Charles Davis, chief executive officer of Stone Point Capital LLC
in Greenwich, Connecticut, bought a 50 percent stake in the
California auction house. Terms weren’t disclosed.
By packing hundreds of bidders into ballrooms at dozens of
auctions a day, REDC says it sold an industry-record 32,799
housing units for $3.4 billion last year.
Bank auctions, foreclosures and loan restructurings have
eliminated “about 60 percent of the bad subprime loans” that
triggered the industry’s collapse, Friedman says in an interview.
The rest will be worked out this year, he says.
New Foreclosure Wave
Now, a new wave of foreclosures is capsizing borrowers with
better credit in higher-cost houses who “got caught up in the
subprime frenzy and maybe overshot the mark,” Friedman says. “I
envision that wave to last probably another 18 to 24 months.”
Foreclosures and liquidations accounted for 34 percent of
the residential market in Los Angeles last year, 30 percent in
Phoenix and 27 percent in Washington, according to Radar Logic.
“Money is made, unfortunately, by the M&Ms of life:
Mistakes and misfortunes of others,” says Monte Lowderman, 41, a
Williams & Williams auctioneer from Macomb, Illinois.
The Upper Marlboro property was the third of 14 that
Lowderman’s three-man crew sold for $2.4 million that day. They
traveled in a rented Toyota sport-utility vehicle on a six-day
swing from Virginia to Massachusetts.
The house once belonged to Jeffrey Whitner, a 43-year-old
independent contractor who ran out of time and money to complete
the job. He planned to use it to showcase his building abilities,
he says. Whitner discovered the empty hilltop lot by driving
around the neighborhood in February 2004. He paid $86,000 to buy
it from an 80-year-old widow, public records show.
$1.1 Million Appraisal
The builder obtained a $651,300 interest-only construction
loan from SunTrust Mortgage Inc., a unit of Atlanta-based
SunTrust Banks Inc., property records show. That gave him enough
to complete 95 percent of the construction, he says.
Whitner says he obtained a $1.1 million appraisal on the
project and in September 2007 was closing in on new funding to
finish. Then the real estate market collapsed, and his bank
credit line vanished, he says.
Between starting and losing the project, Whitner fell a year
behind on child support for his 12-year-old son, owing as much as
$3,600, and ran up $11,034 on an unpaid credit card and personal
loan, according to a Prince George’s County, Maryland, judgment.
“Maybe I put too much pride in the home and wanted to make
it perfect for the owners,” Whitner says.
SunTrust foreclosed on Oct. 26, 2007, court records show.
Ten days later, Whitner defaulted on the mortgage for the
$228,000 condominium where he lived in Bowie, Maryland.
“I got really depressed,” he says.
Burning Building
Lowderman, who is about to auction the Upper Marlboro house,
spits chewing tobacco into a paper cup.
“What we’re seeing today, in my lifetime, it’s happened
once already,” he says.
His father, Jack, worked with Tommy Williams in an Illinois
farm-and-livestock auction firm until the 1980s agricultural
crisis doomed the partnership.
Tommy Williams resettled in Tulsa, where his sales exploits
are family legend. He says he once auctioned a burning building.
When son Dean graduated from Georgetown University law
school in Washington in 1989, he began flipping properties for
profit, buying houses and having his father auction them.
Williams & Williams was born.
Dean Williams says he honed his economic views reading the
Libertarian author Ayn Rand, and named his 8-year-old son for the
self-made businessman Hank Rearden in Rand’s 1957 novel “Atlas
Shrugged.”
“Our focus,” says Williams, “is much longer than prices
going up or down, even in a crisis of this magnitude.”
Unlit Townhouse
At an unheated, unlit townhouse in Capital Heights,
Maryland, Lowderman’s auction team has already disposed of a
residence that stood empty for eight months. The sale took seven
minutes and elicited a winning bid of $139,000. That was less
than half the $305,000 it sold for in December 2006 and 9 percent
below the price a previous owner paid in 2003.
The winning bidder in this and all auction sales must make
an immediate 5 percent down payment and arrange financing within
a month. The transaction is subject to the seller’s approval.
If Fannie Mae, the seller of the Capital Heights property,
accepts the offer, it will record a loss equal to half the loan’s
balance, according to public records. The Washington-based
government mortgage finance company, which hired Williams &
Williams, has absorbed a $56 billion beating on mortgage-related
losses, Bloomberg data show. The mistakes pushed it into
conservatorship last year. Fannie Mae couldn’t be reached for
comment yesterday.
The original lender, HSBC Mortgage Corp., a unit of HSBC
Holdings Plc, has recorded $33.1 billion in subprime losses.
‘Cash is King’
“There’s people who’ve lost a bunch of money,” says Juston
Stelzer, 29, who works with Lowderman as a “ring man,”
recognizing each bid at auction by belting out “Hey!” and
“Yes!”
“But cash is king right now. And there’s going to be some
people get filthy, filthy wealthy,” he says.
It’s decision time for Parkin, standing on an unfinished
floor in the unheated front room of the Upper Marlboro house.
As he peers into the muddy, unplanted yard, the winter sun
frames him in a spotlight.
Parkin says he’s stepped into $1 million tract houses that
don’t feel as hospitable as this one, with its granite counters,
stone fireplace and floor-to-ceiling windows.
Lexus and Ford
“Maybe it’s the analogy of closing the door of a Lexus and
closing the door of a Ford,” he says.
Mechele Silva, 39, a physician who lives nearby, says she
used to peek in the windows to glimpse the builder’s progress.
“It was so much nicer than the old houses that we lived
in,” says Louise Pearson, 84, another neighbor.
While the first minute at auction raised the offering price
more than fivefold, the next 60 seconds tick by without a bid.
“I had never done an auction in my life,” Parkin says. “I
didn’t want to get myself in a position I couldn’t handle.
Then he offers $520,000 and reclaims the lead. The
competitor’s face falls. The auction ends.
Lowderman asks for applause.
“When I won, I had this rush: What did I do?” Parkin said
later. “It was this blend of excitement. And terror.”
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