There are mixed feelings with the news that US property auction giant Real Estate Disposition Company (REDC) is heading to the UK. This is a company which has dominated the US property auction market since its launch in 1990 but one which has attracted as many negative as positive comments over the years. So who is REDC and what exactly will it do to the UK property market?
Real Estate Disposition Company
As we mentioned above, REDC is the largest property auction company in the US and continues to go from strength to strength in the good times and the bad times. The company auctioned off a record 32,800 homes in 2008 alone which beat the company’s previous record of 2007. While REDC is happy to boast that it has assisted tens of thousands of US families and individuals in acquiring their dream properties at knockdown prices not everybody is so keen on the business model and the affect the company has had on surrounding areas.
The business model involves basically setting up partnerships with various mortgage providers and using these close relationships to auction off properties at between 50% and 60% of their previous values. In theory there are many positive aspects to this business arrangement although there are some negative aspects which also need to be considered.
As the UK property market continues to struggle we are seeing more and more homes repossessed and without unique companies such as REDC many of these properties could remain unsold and many months to come. Not only will this have a drag on the overall property market but it will also impact upon the liquidity and financing of many UK mortgage providers.
As we have seen over the last few months the UK banking sector has been seriously short of liquidity and funding with literally billions upon billions of pounds tied up in properties which are either producing a reduced investment return or no return whatsoever. The idea that a company with the expertise of REDC would be able to take on these properties and ensure a quick sale at an acceptable price appears to be a positive factor going forward.
As much as REDC will play a major role in shifting repossessed homes which could in due course drive down local property markets there are concerns that the substantial discounts to “former values” will attract those looking for a short-term profit. Historically the company has attracted a number of short-term investors who are literally looking for a relatively small return on their investments and are willing to under price their properties to get this return as and when prices start to pick up.
There is also a grave concern about the way in which REDC advertises properties which have been repossessed and are now for sale. The process by which a property is advertised for resale includes the placing of a very visible sale sign which denotes the property has been repossessed and is available at a very attractive price. Many people are concerned that this perceived “under pricing” of a property could impact upon local property prices and reduce the value of surrounding homes.
The auction process
The auction process followed by REDC is one which has been compared to a glitzy evangelical sermon rather than a traditional UK property auction. There are concerns that some investors could get “carried away with the moment” with shouts of hallelujah and blowing whistles commonplace in these showpiece auctions. Quite how the UK regulator will evaluate this style of property investment very much remains to be seen although in theory the regulatory environment in the UK is not an awful lot different to that seen in the US.
The fact that REDC auctions in the US attract literally thousands upon thousands of experienced and new investors is one which seems to be attracting UK mortgage lenders who appear willing to dispose of their repossessed properties at literally any price. At the end of the day it will be those who had their homes repossessed that will pay any shortfall after the proceeds of the property sale have been deducted from outstanding debts. So in many ways the UK mortgage industry is in a win-win situation although UK property owners may well pick-up the bill.
The UK property market
There is no doubt that the UK property market is still very much depressed and the arrival of REDC will no doubt inject much-needed activity into a very quiet marketplace. Whether this type of activity will be appreciated by all members of the UK property market is open to debate as some people are concerned that investors looking to acquire properties at rock bottom prices and make a “turn” before placing the properties back on the market could delay the traditional “V” shaped recovery many are hoping for.
Potentially we could see the UK property market bottom out but take longer to bounce back because of the vast number of repossessed properties changing hands for relatively small investment returns. The longer REDC remains prominent in UK marketplace the more prolonged many experts believe the eventual property upturn will be.
While there is no doubt that companies such as REDC benefit from buoyant and depressed property markets there are concerns about the overall impact they could have on the UK property market in the short to medium term. However, with more and more UK homes being repossessed and banks being forced to retain these properties for far longer than expected there is a need to liquidate properties and uses additional funding to increase credit lines to the overall property market.
While the style of auction afforded to REDC customers is nothing like that ever seen in the UK before, it has worked amazingly well in the US and the company has a reputation which is unmatched by any other foreclosure auction company. It will be interesting to see what kind of response this move will prompt from existing UK property auction companies who may well get left behind in the rush towards REDC auctions and could suffer if the major mortgage finance companies decide to push the vast majority of their repossession sales in this direction.
One thing is for sure, the imminent arrival of REDC will see the introduction of property auctions the like of which have never been seen before in the UK!