Good morning.  Yesterday I attended the Delaware County Sheriff Sale with hopes that we would be able to get the Delaware Hotel sold without the lender taking it into REO.  Unfortunately the property did not sell for the minimum bid price.

This property was aggressively marketed through press relations, web promotion and via email.  It generated 4 newspaper articles about the auction, thousands of web hits, dozens of phone and email inquiries, 16 parties showed up for inspection and 6 attended the auction.  Unfortunately all 6 prospective bidders were there out of curiosity because none stepped up and bid the minimum. 

Three of the bidders have already stated that they will probably be submitting offers.  We'll see.

I fully understand that we must have processes and policies in place to keep order and that no process is perfect.  The Sheriff Sale process in today's economy and today's real estate market has fatal flaws that injure the community, creditor and possibly even the owner.

Let's look at this particular asset and use real numbers. 

System Flaw - The appraised value for this property as determined by the Sheriff's Office was $1,290,000.  The Sheriffs Office in many counties now has the disclaimer that the asset was appraised from an exterior review only.  How, I must ask, can anyone gauge the value of a 104 unit hotel with a restaurant, bar, pool and 4 pages of code violations from the exterior? 

Solution - Tough question to answer unfortunately.  It would take an MAI appraiser 3 weeks, an 80 page report and cost $4,500 +/- to do this the right way.   I also can't remember the last time the pre-foreclosure appraisal and the sale price were similar!

System Flaw - A minimum bid of 2/3 of appraised is required. 

Solution - Give the creditor more discretion in determining what THEY want the minimum to be.  In the Delaware Hotel auction, the creditor would have likely taken below $860,000 so it would not need to go to REO.

System Flaw - Bidding starts at the minimum 2/3 value.

Solution - In conjunction with creditor discretion, bidding could start below the minimum of stated reserve price.  I can't tell you how many times I have started an auction asking for bids at one price only to reduce the ask considerably before receiving a bid, ultimately having the bids increase over the first ask to close the auction higher.  Using this solution option would also require the creditor discretion to extend to being able to confirm a top bid below a previously stated minimum.  It happens all the time in traditional auctions.

System Flaw - The deposit requirement was $129,000. 

Solution - A deposit on a traditional contract on the open market for a property of this type and price point would be between $10,000 and $50,000.  More reasonable deposits will stimulate bidder participation.

System Flaw - Short closing time requirement.

Solution - This has actually gotten a little more relaxed in many sales and was not an issue with the Delaware Hotel.

I should acknowledge that modification of the process on the average residential property is not realistic.  Mortgages sold to Wall Street have built in and unchangeable processes attached.  Commercial lenders loaning their own "portfolio" funds should be able to have this discretion with their money.

Other solutions to the problem can be Receiver Sales or Special Master Sales.  Those topics and processes are posts of their own.