Sold! But Did You Maximize Your Non-Performing CRE Loan Proceeds?
According to data from loan sale advisor DebtX, sellers of non-performing commercial real estate loans might want to reconsider the type of auction they use. DebtX studied results from loan sales in its marketplace since 2010 and found that sealed bids generated significantly higher proceeds than those generated by English forward auctions.
The difference DebtX’s analysis found, available in a white paper it compiled, wasn’t insignificant—the sealed bids in fact generated proceeds up to 20 percent higher.
Confused? So were we, so The Mortgage Observer checked in with DebtX CEO Kingsley Greenland, who explained the difference between the two formats.
“The sealed is that you don’t see other people’s bids and you don’t know what’s going on—when you submit your bid it’s sealed,” Mr. Greenland explained. “The English forward auction is that you can see what other people are doing. You don’t know who is bidding, but you will see other bids. It’s kind of similar to a live auction, but it’s not in person.”
Mr. Greenland said that the company’s analysis showed that the difference was marked—and consistent. Currently, he estimated, most banks use the sealed bid auction and special servicers opting to use English forward auctions.
With special servicers potentially motivated by the lure of fees generated via the auctions and banks focused on maximizing profits, the fact that the two would opt for different auction formats isn’t surprising.
As for the reasons the auctions generate such different results for sellers, Mr. Greenland said that it comes down to perceptions about the bidding process’ outcome scenario.
“People have different assumptions of what the outcome will be and that radically changes their bid amount,” he said. “So I can have three people look at a $1 million, non-performing loan and come up with three different prices—from $500,000 to $1 million to $1.5 million. If I do it in a sealed bid auction, those are the three bids I’m going to get.”
Meanwhile, Mr. Greenland said, with an English auction, that bidder who was going to bid $1.5 million sees that the next highest bid that’s out there is $1 million. Therefore, he bids $1.1 million.
“It’s like a bell curve,” Mr. Greenland said. “Rather than collapsing the bell curve into the center, which an English auction does, the sealed bid makes the person who’s way out to the right of that bell curve—you take his bid and win.”
Asked about feedback from sellers of these loans and if he had received any yet or heard of any sellers who had switched up their formats, he said that he had not. “I would hope that anyone that was considering using an English auction would not,” Mr. Greenland said. “We offer it both ways. For performing loans we think that the English auction is a great methodology, by the way. It’s just that the data shows that you’re going to get more money if you do a sealed bid. We would think that logic would dictate that if someone were selling a non-performing commercial real estate loan, they should use a sealed bid.”