Sold! Auction.com Looks to Revolutionize Selling Real Estate
A recent late summer morning at one of the company’s three separate buildings in Irvine, Calif., roughly 100 Auction.com employees buzzed around a vast, open windowless room lined with rows of cubicles and slung with venting and lighting hung from the ceiling high above.
Along one side of the room, which employees refer to as the War Room, wide-screen televisions were aglow with what was essentially the objective of the day’s operation: the sale, by online auction, of roughly 300 residential assets located throughout Southeast Florida.
Current bids displayed on screens, along with property overviews, and timers ticking down the minutes and seconds remaining in the sale.
Auction.com, which bills itself as the “nation’s leading online real estate marketplace,” has sold more than $26 billion in real estate this way—100,000-plus properties—since its first auction was held in 2007. And the company has ambitious growth plans that could, if all goes smoothly, revolutionize not only how real estate is sold, but also the role of many who currently draw commissions on sales, such as lawyers and brokers.
Those plans involve a delicate adjustment in course and the successful execution of several initiatives. With the choppy waters of the United States distressed commercial and residential markets smoothing out, several company executives told Mortgage Observer that future growth hinges on achieving the trifecta of selling nondistressed real estate in nondistressed markets for nondistressed sellers.
The company is also in the midst of a push into Europe. Its second successful German auction sold 31 properties for nine institutional sellers this past June. The assets were a mix of office, supermarket, retail and distribution centers and brought in more than 75 million euros. Its third European auction is slated for the first week in December.
And signs point to an initial public offering currently in the works that could provide additional capital for expansion.
“The key is to become an adjunct to the brokers, working with the brokers, becoming the default platform that everybody uses to help their clients sell real estate,” Rob Friedman, co-founder and chairman of the board, said. “Our ultimate goal is for this platform to streamline the real estate industry worldwide.”
Mr. Friedman and several other executives met with Mortgage Observer in Irvine to discuss the company’s current and future plans. As bullish as those plans are, though, the company does face some challenges, mainly convincing a market that has come to associate online auctions of real estate purely with distressed properties.
Auction.com today is a result of many influences, but chiefly those of Mr. Friedman and CEO Jeffrey Frieden, who as high school friends operated stands selling consumer electronics at Orange County, Calif., swap meets and flea markets. After high school, in the early 1980s, the pair eventually opened a consumer electronics store, Stereo Connection, which grew to several locations.
Upon hearing of a guy who ran consumer electronics auctions for scratch-and-dent, returned merchandise and the like, Mr. Friedman said, the pair put together a consumer electronics auction of their own. The experience was eye-opening and prompted some realizations that have carried through to the business today. For instance, properly promoted auctions move merchandise, potentially a lot of it, while providing participants with a degree of transparency.
Mr. Friedman said that he “immediately fell in love with the auction system,” because it was a way to “mass produce sales—to really help people make decisions.”
While Messrs. Friedman and Frieden were having their auction “aha” moment, selling consumer electronics, hanging out with cowboys at the Western College of Auctioneering in Billings, Mont., (Rob) and running their co-owned Volkswagon dealership (Jeff), Auction.com’s vice chairman and co-founder, Monte Koch, was building a career on Wall Street, starting in the M&A group at Lehman Brothers in 1986.
After Lehman, Mr. Koch went to work for Jim Wolfensohn, who ran the private M&A advisory group James D. Wolfensohn. The shop was sold to Bankers Trust in 1995. He ultimately landed at Deutsche Bank (DB) as the firm’s global head of real estate investment banking thanks to the German bank’s acquisition of Bankers Trust in 1999.
“So I was on Wall Street for 25 years, but I only switched jobs once,” he said joking. “But I had 15 different business cards, because all of these entities kept merging and changing.”
Paths crossed around 2004, when Mr. Koch started providing strategic and advisory services to Messrs. Friedman and Frieden for a land sale business the pair was running. Though he would stay on at Deutsche Bank full-time and develop a pedigree and book of contacts that would prove beneficial for Auction.com, he also provided a key contact that jump-started the Auction.com predecessor, Real Estate Distribution Corporation.
During the financial crisis, a homebuilder friend contacted Mr. Koch. He needed to sell some assets, groups of homes. Mr. Koch thought of Messrs. Friedman and Frieden and approached Mr. Friedman, but was met with some hesitancy. At the time, Mr. Friedman said, his custom was to arrive at work in cutoff shorts at 10 a.m. and leave at 2 p.m. “It was great,” he remembered. Nonetheless, the pair agreed to meet with the homebuilder.
“We ultimately did the 54 houses for the guy,” Mr. Friedman said. “We took 54 homes, and we sold them all in one day at our very first auction—a $10 million auction our very first day. But that goes back to the fact that Jeff and I had a lot of experience with promotion.”
“I don’t think anybody had the idea in their mind that we were going to be making a 1,100-person company out of this,” Mr. Koch, who finally joined full-time in July 2012, said. “That’s what’s always neat about this story as I look back on it.”
Several years ago, before the commercial business, Mr. Koch introduced LNR Property co-CEOs Toby Cobb and Justin Kennedy—former Deutsche Bank colleagues—to the platform. “Literally, they took a look at the platform, and in a snap they understood all the benefits, and they started to run a lot of assets through us,” Mr. Koch said. They liked it so much, in fact, that they decided that LNR Property, a special servicer, would invest in the commercial side of the business.
When Starwood (STWD) Capital Group and Starwood Property Trust completed their $1.06 billion acquisition of LNR Property in April, the firms also acquired a small stake in Auction.com, a stake that Mr. Koch said was “in the single digits.”