With the Miami-based special servicer LNR Partners selling off their distressed and nonperforming real estate loans through not one, but two online auctions this year, eBay-style platforms seem to becoming acceptable.
Based on the recent activity of LNR and indeed other special servicers such as ING Clarion Capital (now called Torchlight Investors), selling nonperforming real estate assets through online auctions is certainly getting a good deal of traction.
In February, the pair sold $124 million of the $200 million of nonperforming loans they offered at an online auction through a venture of Jones Lang LaSalle and Real Estate Disposition. The loans sold for 50 cents on the dollar, compared with a loss severity of nearly 58 percent for loans that were liquidated in January.
Then in May, LNR followed up by putting 69 distressed CMBS loans and foreclosed properties – $330 million of assets – up for auction through the popular Auction.com platform. The firm recovered roughly 58 percent of the unpaid balance of loans and REO that it actually sells as a result of the auction.
One advantage to such a format is that it enables the seller to publicise the sale as if it's a global event. Another is that, since the marketplace is online and public, the seller is reaching out to a larger number of buyers (namely, everyone). With online English auctions, virtually anyone with an internet connection can participate.
Not only that, but when trying to resolve distressed debt, note sales can sidestep the “lengthy and costly” foreclosure process.
“It's about getting back as much as you can as quickly as you can in this business,” one participant says. “These note sales represent real resolutions where cash goes through the waterfall verses the loan modification, which is being used most frequently in the industry today. There is an argument that modifications are just kicking the can down the road.” The other factor is that the process is transparent. There's no secret handshake, no back-room deal and no old boy network.
However, the approach is not without pitfalls. Kingsley Greenland, president and chief executive officer of DebtX, a Boston-based global loan sale advisor for commercial, consumer and specialty finance, warns confidentiality and security becomes an issue.
Many banks don't want to be part of an eBay-style auction because, since everyone and anyone can participate, a great deal of confidential information on the assets is being disseminated to a large group of people. Plus, they may not be the best way to maximize profits for the seller. He says: “Under an English auction format, the winning bidder only has to pay a penny more than second highest bidder, rather than the full price they would have been willing to pay in a sealed bid format.” He added that this is why DebtX has a platform where potential bidders are rigorously vetted before being allowed to bid.
Nevertheless, regardless of whether this transparency or openness is a benefit or a problem, these English auction-style platforms look like they are here to stay and appealing to those in the distressed asset game.