AuctionPoint Hopes to Jump Start Commercial Real Estate Market

What is AuctionPoint's business? What is the real estate market niche it intends to fill?

AuctionPoint is a tool that's been developed to address what we see as a stagnant market. Since the credit meltdown two years ago, the commercial real estate world has been at a standstill across the board: the leasing market, the purchase and sale market, and the development world. Commercial is not restricted to office and industrial; we've seen the stagnation creep into all aspects of the market, even hospitality and multi-family. There really isn't a segment of commercial real estate that has not been impacted by what happened in the credit markets. Unlike the last real estate recession of the late 80s and early 90s where it had, for the most part, to do with "Economics 101"-supply and demand-this time supply and demand is a factor but it's multiplied exponentially by the credit markets freeze. Those of us in the real estate world are battling to create business and create value in some of the worst economic conditions any of us have ever faced.

How did you, as a founder of AuctionPoint, define the market opportunity?

I am a real estate developer. I've been in real estate for the past 20 years and have reinvented myself along with the cycles. Since 1998 I've been a developer taking advantage of an incredible market where capital was free flowing. About six years ago my partner, Joseph Tang, who comes from the technology world, joined me. For the last six years we've been developing real estate, mainly in Orange County and mainly for-sale commercial condominiums. We saw the opportunity to purchase large, vacant warehouses and distribution buildings in Orange County that were vacant because the tenants, which were mainly industrial tenants, moved to cheaper real estate in the Inland Empire. It left building owners scratching their heads as to what to do with their buildings. We bought these buildings and subdivided them into smaller commercial condominiums and sold them to local businesses in Orange County.

For several years that was a very good business; we were selling them like hotcakes until the music stopped, which was about two years ago. We were stuck just like everybody else in real estate was stuck-with inventory and vacant buildings that we could just not figure out how to sell. We were working with the best brokers in town-CB Richard Ellis, Voit, Cushman & Wakefield-but we could just not figure out how to dispose of these properties, and during that time the values continued to decline.

We asked them to apply the auction platform to the real estate world and hold auctions for our properties. We realized that they were not equipped to do that. Our next step was to approach traditional auction companies, and they all said, "Yes, we would love to auction your buildings," but we realized that they were not the best people to fill the ballrooms with buyers. That was the brokers, who knew the local markets. So the opportunity arose for us-given Joe's background in technology and my background in real estate-to create an online auction platform dedicated to commercial real estate assets and providing commercial real estate brokers the ability to create auction websites for individual properties.

You're affirming that "necessity is the motherhood of invention"?

This is an invention in the truest sense of the word. This platform was inexistent 12 months ago. If it had been, Joe and I would have used it. This was an invention born out of necessity because there was simply no other way for us to sell real estate in this kind of market.

Can you elaborate more on auctionpoint.com?

At the 20,000 foot level this tool allows brokers to create property-specific auction websites under their name and brand.

What we're doing is connecting the power of the auction (auctions have been around for thousands and thousands of years and are a very good way to sell many things) with the power of the broker. Live auctions, where the guy is up there with a gavel, are a terrific platform to sell antiques and furniture, but they don't work well in the commercial real estate world because the auctioneer knows nothing about industrial condos in Irvine. The best guys to market this auction are the brokers. We're equipping brokers with a tool that up until now they did not have access to. Prior to AuctionPoint, the question for property owners was should we continue to let these guys put up a sign in front of our building and make phone calls and, in a maddeningly inefficient manner, try to sell our real estate in this impossible economy? Or should we arm them with this online auction tool and let them auction our properties online? It became a no-brainer to us that this was the right direction to go.

You've completed now a few auctions. How has it worked? What is success?

At a site called www.CBREauction.com/Unit25 is an auction that was conducted on September 18. This is a building that my partner and I had owned for about 24 months and had been trying to sell unsuccessfully. We needed to sell this building in order to pay off a construction loan. The construction loan was nearing maturity and we were running out of options. It was either sell this thing or get foreclosed upon. So we asked CBRE to run an auction using auctionpoint.com. They created this website and from the moment they launched, they started marketing this URL, CBREauction.com/Unit25, to the correct pool of potential buyers.

If you're a buyer, you come to this site, you enter the site, and you have access to information about the property and the auction. If you want to dig in deeper to the site it will ask you to register. In a matter of five weeks, from the beginning of marketing to the auction date, which was September 18, they were able to sell this property at auction at a particular price.

The intriguing thing about this is that up through September 18, nobody had any idea what this building was worth. There were so few comparables on the market-so few sales had been done in the prior 24 months-that the buyers had no comfort that whatever price they paid was a fair price, and we, as sellers, had no comfort that whatever offers we were getting were fair offers. It wasn't until we utilized this tool and created a marketplace of buyers, and they had an opportunity to research this property and bid on it, that we realized that a fair price for this building is $1.73 million. Back in the day this property was a $2.2 million building-which is fine with us, all we wanted was to realize fair market value, and without this tool we were unable to do it.

What is the value proposition for the broker working the auction?

The broker that is working on a listing in today's market puts up the sign, puts it on multiple listing services, makes phone calls, takes people on tours, will bring offers to the seller, and then the seller has the right to say, "No that's too low, try again." This process can continue for months and months and oftentimes is unsuccessful.

Our brokers went through that process for 24 months on the Unit 25 property and the buyers out there were essentially bottom feeders. There are two classes of buyers right now: One are bottom feeders that write offers at ridiculous prices. For instance, on this building we may have gotten an offer a year ago for $500,000-take it or leave it. The other category are buyers who are sincerely interested in buying this as an investment or to move into, however, due to the lack of comparables they're all waiting on the sidelines. They read the papers; they see the pessimistic news; they see values declining, and they're just waiting for the bottom. But nobody knows when the bottom of the market will come. We've turned the tables on the buyer community through our brokers and through the AuctionPoint tool, communicating to the buyers that they've timed the market perfectly and can bid on this asset.

For the brokers this is the best thing since sliced bread. For the past 24 months, these brokers have been working very hard for us and haven't been paid a nickel. They've been working very hard for clients and haven't been paid. There are many brokers leaving the industry because there are no deals being done and they're just not making any money. Now all of a sudden the sellers who really, truly need to sell but don't want to do so at a ridiculously low price are coming to the brokers saying, "I would accept an auction price as long as it was conducted fairly." Now the brokers have another tool in their bag to convince sellers and buyers to come together and earn their commission.

Brokers will earn and keep their full commission, meaning that we don't adjust commission structure between the seller and the brokers. AuctionPoint collects a 1 percent buyer's premium from the winning bidder at the close of escrow. Our interests are all aligned: we have a seller that wants to sell property; we have buyers that want to buy properties at good values; we have brokers that want to bring those two together; and we have AuctionPoint to provide the infrastructure to make this all happen online.

There is $1 trillion in bad assets sitting in the commercial market. What's your game plan at AuctionPoint to deal with that reality?

The prospectus for AuctionPoint is very good. The $1 trillion mark comes from a Duetsche Bank report that was issued about a year ago that states that over the next five years about $1 trillion in bad debt and distressed real estate is about to hit the market. Up to now there really hasn't been a logical way for those assets to make their way through the pipeline from distressed seller, to the bank, to the end user buyer/investor. We know that the magnitude of the problem is quite large, and we know that it's going to happen soon, but the brokers up until now have been using very prehistoric means of moving real estate assets.

Is Orange County your focus or is it a more regional, state, country type of agenda?

We started off in Orange County because that's where the properties that we owned were located. We wanted to test the market to make sure that this tool would be accepted and adopted by brokers. Now the auctions and brokers are coming to us from Nevada, Missouri, Northern California, Memphis-that's just mentioning a few of the auctions we've been asked to set up. This has all happened since August 2009.

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If we speak to you in a year, what are we most likely to be talking about regarding AuctionPoint?

We'll be talking about a tool that has been adopted by all of the major brokerage companies across the country, a tool that is going to become an accepted means of transacting real estate. This is akin to the stock market. The stock market has become a very efficient marketplace. The real estate market is entirely inefficient. Everything is done is a piecemeal fashion. This is one of the first steps to make the real estate marketplace more efficient, to create true market values, and to create a system where people aren't guessing at values but are actually bidding up the values to whatever the market will support.