Jon Gollinger on How to Successfully Auction Real Estate
- Oct 24, 2011
By Jessica Fiur, News Editor
Virginia Beach, Va.—Real estate developer Armada Hoffler has partnered with Accelerated Marketing Partners (AMP) to sell the remaining luxury condominiums at The Residences at The Westin Virginia Beach Town Center, Virginia’s tallest building.
The condos will be sold at auction, but this isn’t your usual real estate auction. AMP is bringing its strategy of transparency in the marketplace to The Westin. Jon Gollinger, East Coast CEO and co-founder of Accelerated Marketing Partners, talks to MHN about his company’s atypical auction structure, and why it’s such a success.
MHN: Describe your auction model.
Gollinger: Our model is basically a market-driven model. First of all, my background is conventional marketing, so what we’ve done is over the years we’ve created a hybrid system that’s very unique and different from most every other auction company. And, first and foremost, we’re not truly an auction company in the truest sense of the word. We come from a conventional background, so we’ve combined both conventional and accelerated marketing into this hybrid system. What we do mostly that sets us apart is we never have non-published reserves in our sales. They’re always published reserves. So, in other words, it’s not an opening suggested bid, subject to seller confirmation in the back of the room, or on the floor, even. If you meet our reserve price—and we never go below it—you will own the unit if no one else bids on it.
The second difference is we never have buyer premiums, so there’s no percentage above the sales price that one has to pay, which is true of most auction companies for the privilege of bidding and winning at auction. We don’t have that.
And the third difference is that it’s very seldom that we allow multiple bidders—I mean bidding on more than one unit at a time. We don’t have people in the room who might be bidding on 10 units. It has to be an exception approved by me; and a sale is usually someone who wants to combine the units or buy the unit for a child in the building as well as one for themselves. Typically we don’t sell multiple units to one person for investment purposes.
MHN: Why this strategy?
Gollinger: Well, for a couple of reasons. We want the room to understand that they’re bidding against other homeowners for the most part—not that we discriminate against investors, because we like investors bidding, but we want them to know that it’s not one bidder who’s sitting there trying to bid on a lot of units and maybe spiking the price of a particular unit because it could be misunderstood. It could be misunderstood for a whole host of reasons, and so we just try to take that out of the equation. Most of the jobs that we handle are predominately projects that appeal to end users or homeowners. And, by the way, 95 percent of our homes are sold to owner occupants, and owner occupants aren’t looking for a return on investment, as the investor would be, of course. They usually can pay a little more.
Typically we’re taking projects that have appeal and demand towards the end-user market, or we don’t do it. We’re not a foreclosure company. When our model ceases to be useful in the market, we won’t continue doing auctions of anything else. So our job is much like other companies that try to make market; we’re trying to create a marketplace where there has been this dis-equilibrium, either in terms of the overall marketplace or the building in question, meaning buyers don’t know what to pay, and sellers don’t know what to accept. So we analyze the market to determine whether our process would work on any particular building, whether we believe that there’s a depth of market, and, in fact, whether we in turn can see a projected value that we believe the market would actually move towards if we could create a competitive environment that drew the market to the building, and that is what our sales are designed to do. They’re very strategic, they’re very thoughtful, they’re very respectful, they’re very transparent and they’re very efficient.
MHN: Do people react better to this type of auction than a traditional one?
Gollinger: I can’t speak for the traditional as it relates to those methods that we don’t use. But I will say that our method works well for us and we think it’s the best method. We believe in the market place, and we believe in our analytical abilities, and most of the people we work for are really the best and the brightest of the industry. We’re dealing with the institutional and the institutions, whether it be banks, or insurance companies, or equity funds, or mezzanine players. We’re very successful. Those are the types of people we work for, and they expect strategy, they expect intelligence, and our job is to deliver results. And that result is within the ballpark of our expectation that the market will deliver; and typically, we’re right. Sometimes we’re wrong, but our failure rate is very low. And typically, when we don’t take something to auction, that’s what I’d consider a failure. I don’t think we’ve ever failed in taking something to auction, because at that point we know we have enough bidders against the number of units that we’re putting up to, in our opinion, deliver an honest, competitive environment.
MHN: So you have a 100 percent success rate with the auctions?
Gollinger: We might not sell as many in some places as we’d like, and that would be judged as less successful, we might sell more, and that might be judged as more successful, but typically we’re around the number that we offer. If we don’t have the depth of market, we might sell less units than we thought we would have, but that will still put us into a position to deliver a result that is in our projects. So the perfect sale is—and never, by the way, are we right on the number, but we’re always in the ballpark—we put up 40 units on to auction, we sell 40 units, within a deviation of 5 percent of the number we projected.
MHN: How is the market doing in this economy?
Gollinger: That’s very interesting. I was involved in this in the last cycle, and it was easier to predict because there were less condominiums. The problem in this marketplace is that for whatever reason, the government has not allowed real estate to bottom, and therefore it’s perpetuating what I again call this dis-equilibrium where people are afraid to buy because it could go down more, as opposed to letting it just go down, taking the tough medicine and then of course you could go up from bottom.
I think that in 2007 and 2008, we operated on a standard deviation against our numbers of 7 percent. So if we projected a number of what we thought we could be up or down from that number, and in the early part of the cycle we were more wrong on the down side, but we built in enough margin at 7 percent, so as long as people played with us they understood that down-side risk, and if we were within that deviation they were acceptant of the result. As the market matured getting into 2010, the deviation started going from 7 percent to 5 percent, which meant to me that the market was maturing and getting more confident, so the ground was more solid under their feet—terra firma, if you will—was returning. And in 2011, with the stock market, the financial situation, the entitlements, our government not seeming to be able to get their act together, the polarization, I think the deviation on our part could be growing again. It’s gone from 7 to 5 percent, and now I’m uncomfortable at 5. I just think that there’s another couple of years of this stuff. It’s an elective kind of an issue.
This lack of capitulation on the part of the government and banks has an unfortunate byproduct which is a paralysis in the marketplace. And so our program continues to be necessary. What we do is take a look at our market value projection, which in our opinion is the true market value. Then we set the minimum bid price or some published reserve price, which represents a ludicrous reduction from our view of the market value, and therefore coming from our position we think the consumer is brilliant. We think the consumer is brilliant for a number of reasons. They have hard money that they’re putting down that’s elective; they didn’t get caught in an up-cycle. They’re in a down-cycle and not going to be foolish about their money and throw it away, so they’re going to do their homework. Because of the Internet, their homework is much easier, and if they’re good with the Internet they can be smarter than most of the brokers, particularly if they’re financially savvy to begin with. So we assume that the consumer—which is an advantage to our system—is smart and studious and protective with their own money. So when we set a minimum published reserve, they’re going to look at it as a one-time opportunity—a once in a lifetime opportunity, in fact. They’re going to gauge during the discovery process that the value that I discerned is the same number. If we can find it, they can find it. If they can find it, and we can bring the right bid-to-cover ratio on each unit that we offer, we can feel confident that they’re going to deliver to us a reasonable market value. The buyers are looking to get a fair deal. And alternatively, so is the developer. It becomes a win-win.