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Tranzon Auction Properties Network With Mike Carey
In this series, what we do is I interview real professionals who are out there in this market making it happen. I’m happy to have him back again, Mike Carey. He is the Senior Vice President of Sales over at Tranzon Auction Properties. If you don’t know Tranzon, it is a nationwide network of real estate auction and also some brokerage company, who I used to work with covering the Southern New England territory. Mike and I, together, we’ve sold a lot of stuff.
We were on a roll there for quite a few years right after the crisis.
Stuff like office properties, condo development, subdivisions, gas stations and hotels.
Do you remember that development deal up in the Wooster suburbs? That was fantastic.
It is like an age-restricted deal. That was the thing for a while. Everybody wants to do these age-restricted deals and then all of a sudden, that wasn’t a good idea and it turns out old people don’t want to live in Massachusetts. Mike is probably one of the most experienced people I know in working with institutional sellers, specifically commercial property. He’s been on all sides of commercial real estate, default, delinquency and foreclosure. He sold plenty of commercial notes, has brought the gavel down for commercial foreclosure auctions and sold commercial REO for big banks, small community banks, hedge funds, and insurance companies. Virtually, anyone who owns real estate or real estate debt.
I asked him to come on here because if you’ve looked it up, you know that commercial real estate is in a weird place now as a result of COVID-19 and all that goes with that. I asked Mike to talk about a couple of things. The first thing we want to talk about is a little bit about selling a commercial property at auction and the differences. A lot of people think about foreclosure and they think about it like courthouse steps. You walk out there and you get $5,000 in your pocket. It’s sight unseen, you don’t know what’s happened and the property is sold or maybe it isn’t. That’s not the auction that Mike runs.
I want to talk a little bit about that and the difference of what goes into maximizing the sale, especially on a defined timeframe. After that, we’re going to talk about a couple of strategies, maybe a couple of war stories, what we’re seeing and hearing in the market. With that, let’s kick it off, Mike. Let’s start with dispelling that foreclosure auction idea for anyone who’s not been involved in real estate sales, as you do.
We do a variety of different things, from a consulting basis to a sales basis to an appropriate basis. Our core business is the marketing of assets in less than 90 days. Our clients have to have some time anxiety. They don’t have time anxiety. If you have time on your side, you don’t need me. I bring no value to the transaction for you. Historically, the business has come from institutional sellers who look at those things and say, “We have a core business that’s way over here that has nothing to do with what this is.” We don’t want to own this. We want to make sure that we expose it to the market. We want to make sure we’ve done a good job finding buyers. We want to use a process that helps maximize value as much as possible.”
At the end of the day, our goal is to sell all things being equal. If it’s close, we’re going to say, “Yes.” I had the pleasure when I first got in this place of finding myself in an interesting position where we had a relationship with a federal lender. They had a portfolio of loans that had been charged off but there were collateral, personal guarantees and a variety of other things that were still associated with it. In that, I was handed files with a title search to make sure that the lien still existed and find out what else was on it. From there, I would take hundreds of files and I would work down to maybe 8 to 12. I literally got on a plane, rented a car and went to drive around West Texas for a week.
I would knock on people’s doors and say, “Do you own this asset? We have this very old lien that’s not extinguishable. The good news is somebody is here to help work it out.” Some of those ended up being work outs. Some of them ended up being lump sum payments. Some of them ended up being completely dead ends. Some of them ended up being foreclosures or notes sales. With that, it was interesting because I did foreclosures in an 18-month period. I managed foreclosures in 30 states. I have a real understanding of the process in each state, which is dramatically different, California versus Maine to get as far away as you possibly can get. There are dramatically different processes and standard operating procedures.
What I learned was that in that process, there’s some flexibility you have to meet the legal requirements. There’s a minimum legal requirement, no matter what you do but if your goal is to not own something at the end of a foreclosure process, there are ways that in any jurisdiction that you can at least try to make sure that you have buyers who are well-informed. I was working on an article myself because I got a call from an appraiser and they said, “What’s the discount for auction?” When I hear that, it makes me cringe. I wanted to reach through the phone and strangle people.
I was like, “There’s no discount for auction. The process is the process. The auction process has been around for thousands of years and people pay more than fair market value. I don’t know how you want to define fair market value but to use your vernacular, what people discount for is for lack of information.” Sometimes people can discount for cash or for a quick close. As a seller, you have this kind of, “I have these demands that are over here. These are the things that matter to me. Price, timing, and process are some of them.” You’re never going to get them all met, maybe but probably not. If you can get as many as you need to be met, then you win. If time is important to you, you may have to sacrifice price but you don’t have to sacrifice all the price because if you can get people information, they can be informed purchasers. If you can’t get people in buildings, to rent rolls, to historicals, to environmental, then they’re going to discount because we all want a discount. You don’t know what you’re buying at that point. You have to build in some concessions for the unknown.
Get a price in uncertainty, that’s one of the things that I feel that Tranzon, in particular, has always done a good job at and should take pride in laying the information bare before all of the potential market.
We work hard to front-load what would be a typical post-contract due diligence period.
Talk to us a little bit about that because the due diligence piece is something that scares people. They say, “I’m going to show up. I’m going to have to put this non-refundable deposit down. I don’t get to find anything out about this sale,” but that’s not how you guys tend to operate and that’s not how you get the best price out of a sale, is it?
No. We work for the seller. We work for the mortgagee in a foreclosure situation and the lender. That being said, I spend most of my time waiting for buyers and being a service person. I am trying to get questions answered and find out what’s important to them. I had a transaction for a commercial coastal property that was tenanted. This was simple. It’s as simple as I got in the car, I drove to the property, I met with the tenant and I said, “Here’s the circumstance. Here’s what we’re dealing with. Do you want to stay? Do you want to go? What’s your plan? Are you paying rent? Have you been paying rent? Are you withholding rent now but you’re willing to pay rent in the future? Are you okay if I do some open houses? Can I get people to walk through? Can we do these things?”
That worked out well. It came together well. They were cooperative. We sold it to an investor who’s going to keep them as a tenant. We had eight bidders at the auction. I can’t promise but you’ve been around. There are some things that sometimes you can’t answer. There are disputes. There are legal challenges. There was a question about the buildability of a lease and when it was recorded and in that circumstance, what you do is you tell people, “This is what I know. This is what we don’t know.” You need to prepare accordingly.
I’m hearing from a lot of family offices, different investors, and people. Their ears are perking up especially in the commercial front these days. What would you say to somebody who’s eyeing or maybe they want to get back in the game because the price is changing a bit here and they want to contact somebody like you or they’re thinking about maybe they want to bid at an auction?
The first piece is as all are welcome to real estate, you’ve got to know the market a little bit unless you’re talking a triple net ground lease style properties, which is what everybody wants. It is because you don’t have to think about it and the spreads are tight. If you’re into it and looking at it, trying to find yield at someplace, then you’re going to need to work a little harder to do that. You’re going to have to pick off some properties that are in secondary and tertiary markets, potentially. Those opportunities are out there. As we’ve talked about, it’s about making sure that you’re comfortable with the full picture as best that you can be and asking them the right questions.
You needed like all good things in the world. You need a good team. You need to know that you have boots on the ground that can handle real property because somebody is going to call you that the air conditioner is broken. You need to know that you have a good leasing agent who can help you work through those scenarios when they come up. You need to have good legal representation who can look at you from a practical standpoint and say, “You’ve got risks, yet there are a lot of opportunities here. Do you think you should take advantage of them?”
One of the biggest differences that in my experience with you and the Tranzon team between the commercial foreclosures and those types of auctions versus the residential is the access. It is rare. We’re not knocking on homeowners’ doors and walking people around their homes before we foreclosed on them but that’s not the case in commercial real estate, is it?
No. Nine out of ten times, you can arrange for access and either you can arrange for access via legal means because you have the right to access.
Within the loan document, it says, “We have the right to access,” in this case.
You can arrange for access by being a nice person and asking. People can say, “No.” They can make life difficult but at the same time, there’s something to be said. The good attorney will tell you never to talk to your distressed borrower. At the same time, if you’re not a national lender, you have more flexibility in that process than Wells Fargo does.
Tell me a little bit about why that is. Why do you say that?
It is because you’re not beholden to a stock price. You’re not beholden to a variety of regulators who are prepared to audit your files at any given moment and will. You also don’t necessarily have the world’s deepest pockets. From that perspective, the dollars and cents that people see when they are like, “I’m going to take so-and-so National Bank to court.” There’s no purpose in taking me as an individual note investor to court. I don’t have much that you can get. You also have more flexibility on terms, timing, price, process, back to Cash for Keys and reduced trends like, “Stay here and keep an eye on it. Here’s a rental agreement. Let’s work that out.” That’s the grinding work that it takes to find the extra 2%, 10%, 200%.
You’re bringing a commercial property to auction. I then call you up beforehand and say, “I want to buy the note.” What will you tell me?
I’ll say, “I love that idea depending on the circumstance.” Some of it is dependent on who my client is. I’m going to roll the rewards story. Earlier in 2020, when everybody was freaking out about COVID, it was January and February, I had a transaction going on. It was a foreclosure for a mixed-use building, restaurant, apartments and a little bit of retail in a great city. It was a hard money lender that I was working for. It is a short-term loan that had matured and was in default. We were approached by a regular bidder of all the assets. He said, “Can I buy the note?” I said, “It’s an interesting question. Let me find out.” The answer eventually was, “Yes.”
Candidly, there was not much discount, negligible. It was probably as close to a par transaction as I’ve ever done. This note purchaser wants to own the building. He doesn’t own it yet. It’s been months and a variety of things have happened since that. I don’t know that if with or without COVID, it would’ve made much of a difference but at the end of the day, he’s either going to have a very nice loan that gets paid off and he makes a little bit of money on it or he’s going to have a building that he’s happy to own. That’s one of those lessons too. In one of my previous lives, I was an instructor for Outward Bound and we would spend a lot of time mapping out expeditions.
What was always great was that you build these great plans, you spend days working on them and inevitably in the first 36 hours, you were behind schedule or somebody was hurt. You’ve got to have a plan B like, “What’s plan B if we can’t make our marks?” That’s similar in this business, it’s like, “What’s your plan B?” You’re planning to work this out. You’re going to buy a note. You’re going to restructure it. You’re going to extend. You’re going to renegotiate interest rates. What happens when that doesn’t come together?
Often, I get questions, “What’s the discount on notes? What am I going to get for a discount? How much should I pay?” Speaking to what you’re talking about is you have to have a range. You have to look at possible scenarios and figure out on the real bad side, “Here’s where we could end up,” or “If everything goes pitchy, we’re over here.” Are you comfortable living in that range? There are going to be unknowns.
I do a lot of work for bankruptcy trustees and they have the weirdest stuff to sell sometimes. I don’t do much of that but they have some buyers who will buy almost anything, equity, receivables, tenth of a share of an LLC, your judgments, weird stuff. The people I know that are buyers of those things, my experience with them is that they diversify. They have enough balls in the air that at any one moment when they pay $5,000, $50,000, $500,000 for something. They have enough other things going on that if that thing ends up being a total dog, they’re like, “That’s okay. We lost on that one but we did great on Apple so our stock portfolio is still fine.” That business premise of making sure that if your access to capital is $100,000 or $100 million, you don’t want to necessarily put that money all in the same spot. You go by as much as you can at $20,000 each.
You mentioned hard money lenders and private investors a couple of times. I wonder if we could touch on maybe a couple of strategies you’ve seen from the people you’re doing some more regular business. There’s the institutional seller side but then there are all the guys, girls, funds, firms buying that stuff. I know we have been involved with people with a number of different strategies but maybe touch on what you’re seeing a little bit these days, if you can.
Overall, I will say that there is no wave of distress hitting our desk from lenders that we usually work with.
They are interesting because I have seen way more emails in my inbox from you with sales. You have a big nationwide sale going on as we speak, isn’t that right?
We always experienced a fourth-quarter bump, no matter what. It’s a normal part of our business. Unfortunately, it’s not as predictable as anybody would like but it exists and it usually happens. There was a variety of distress. We had our busiest first quarter from a distressing period in 2020 than we have in the previous years. Pre-COVID, it was more on the books from banks, pure banks, community and national banks than we had in many years. To me, it was clear that there were some deals hitting the skids and then COVID came. It was a hard stop for 60 days.
A few things have trickled through since then. Mostly, smaller commercial and things that are essentially jingle mail. They’re the borrowers who were like, “I’m done. I’m not coming back. Clean me up.” That stockpiled into what you see now from an advertising and marketing standpoint, the properties that you see out there. The other piece that we’re seeing is that a lot of our clients are not banks now. There are other, whatever you want to call them, private equity, some direct owners, some estate stuff, all of that stuff is trickling up. Partly, people are trying to read crystal balls and saying, “This market feels too good. It feels like the right time for me to exit.” Part of it is demographics, which is the age of people, they have owned this thing for 20 years and they were like, “I don’t want to own it anymore. My kids don’t want it and I’m ready to leave to get out.”
We know defaults are soaring and all that and that leases aren’t being paid. I know you don’t have a crystal ball, but presumably at some point someone pays the piper. Do you have any sort of feel? I know you’re probably on the phone with workout people at banks every week. Is this not hitting their desks yet? Is it all on pause until they figure out what’s going on? What’s happening?
Some of it is simply pegged to the fact that even from a commercial standpoint, people are benchmarking the Fannie-Freddie moratoriums so that they don’t end up being massive red flags out there. The other piece is that most of the COVID forbearances expired. I get better information from creditor rights attorneys because they’re in and they get the initial update like, “Here’s what we need you to move on. Here are the files.” Depending on the jurisdiction, they are 3 to 6 weeks ahead of engagement of me. They’re indicating that they feel less patience from the lender side that is, “You had your time. We’re ready to give you more time but why? Give me a reason because at the end of this, if you can’t hit me a ten-week cashflow that is starting to show some improvements, we’re going to have some problems.”
The other piece of that is for our note investor, in particular. It’s an interesting moment because my sense is that there are what we would call small business balance loans, not small business administration loans, under million-dollar small business loans. There are going to be some business owners who look at that and say, “I’m not ready to write a check for $10,000, $100,000, $1 million in order to bring myself to sign another note to whatever. I’m 63 years old. I’ve done okay. My retirement is okay. I don’t want to dig another hole.” Some of those people will exit their industry and say, “I’m done.” Some lenders won’t want to necessarily work out. They won’t want to take all those things to foreclosure. I think that it may be low hanging for people out there to say, “I can go in and grab these things. It’s an asset purchase and I can own the note, foreclose, own the asset, improve it, put it on the market and sell it.”
Let’s talk about who should be in touch with you. There are a variety of people, maybe commercial brokers, certainly. Maybe you talk about how you might work with them. If they are a lender, note investor, or buyer, how should they get in touch with you? How do you work with those people?
We do a lot of referral work and joint ventures with commercial brokers. Everything from full-on deal split to simple happy for you and if it ever comes through, please send me a percentage.
That’s nationally you work with all the time.
I have three transactions that were all referrals from brokers.
Were they paid?
Yes. Typically, from that perspective, I say, “Before you do that, either if you’re getting signals from your potential client, that there’s real-time anxiety here. We should think about working together. Before you do that massive price reduction or take the offer from the best local investor that everybody knows will buy anything at some price, we should talk.” What’s interesting is the response to properties is still astounding.
There’s a lot of cash out there still. We’re probably smelling a little blood in the water and that’s the feeling anyway.
To roll back, you’ve asked about, “I want to buy the note. Can I do that?” If you want to be a note purchaser, pick up the phone and call the person that’s listed on the website and say, “I want to be a note purchaser.” There are quite a few lenders who will exit. There are some who, by the time, get to that process, say “Too late,” so it is not worth the time to try to negotiate and deal. Unfortunately, they’ve also been around the horn enough with people who are like, “I’m a note buyer.” They come back and it’s a million-dollar asset and they get an offer for $135,000. You’re like, “We thought we were real.”
The note purchaser who’s trying to work out assets sooner rather than later typically, the initial call is a consultation. We’re always happy to try to impart whatever knowledge we have. I’ve been doing this for many years. I love meeting new clients but I like keeping clients better. Historically, my repeat client is almost 90%. We do a bunch of one-off relationships but a lot of our business is repeat. That resulted in the fact that somebody calls and says, “Here’s what I’m dealing with. I’ve got a guy who will do this or we could move toward a liquidation. How am I going to do with the liquidation?” My answer is, “I have no idea but let me tell you what I think.”
How should people contact you if they think it’s appropriate?
That’s bold putting that number out on the show because we reach a number of people. That’s all it is out there. Thanks for doing that. If you’re a buyer, don’t be afraid when you see that auction listing to reach out and have a conversation. I can’t emphasize that enough how good a job Tranzon does of laying out all the information they have for you. It doesn’t have to feel blind, scary and in the great unknown if you’re out there shopping. Pick up that phone and they’ll walk you through the whole process, how you get comfortable with how to buy and what it all looks like.
At the end of the day, that’s how we make transaction fees. I am happy to do it.
Thanks, Mike, for being here. Mike Carey, Senior Vice President of Sales at Tranzon Auction Properties. It is awesome having you on here and maybe we can talk after Q1 and we’ll see what’s happening then. I imagine it’s going to be a little bit different story than it is here at the beginning of Q4.
I’m not predicting.
We’ll talk to you soon.
About Mike Carey
Mike is the Senior Vice President – Sales for Tranzon Auction Properties. He’s managed over $200 million in commercial, multifamily, residential, and industrial transactions.
Mike is a Licensed Real Estate Broker in New Hampshire and Maine and a Licensed Auctioneer in numerous New England states.