AIPIS 52 - The Luxury Real Estate Market with Scott Foerst

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Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds.

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It's my pleasure to welcome Scott first to the show. He is director of luxury real estate at Heritage Auctions and he can give us an overview of some high end property markets and auction markets all over the U.S. caribbean and Canada. Scott, welcome. How are you?

I'm very well. Thanks very much for the invite, Jason. I greatly appreciate your time.

Well, my pleasure. So what's going on in the auction business nowadays?

We're busy, which is a good thing. And whether the economy is good or the economy is not running as well as we would like it to be, we stay busy. But it's nice to be busy in an up market. Is that fair?

Yep, yep. Sounds good to me. And tell us about Heritage. You are involved in all sorts of auctions and we're talking about luxury real estate. But you're involved in many things, right?

Yes, that's correct. My partner Nate Char and I, we're directors for the real estate category within Heritage. But as the world's third largest auction company, we have about 38 categories that range anywhere from coins and currency to automobilia, fine wines, sports memorabilia, comic books, you name it, We've definitely taken a look at it. And there's a lot of information on our website for those who may not be interested in real estate but may have other collections that they have interest in.

Fantastic. Well, talk to us about the real estate auctions and this is most of the market we're discussing is 2 to 10 million dollars. Is that correct?

Yes, that's correct. And these are primary residences, often second and third residences as well. And you mentioned appreciate that they are throughout the US In Canada and the Caribbean. These are not distressed sales, but these are properties that have somewhat languished on the market. Sellers have decided that they've tried traditional methods which have not brought them the market per se, and also a sale to fruition, and have decided to think a bit outside the box. This is actually very common in Australia, New Zealand, some European countries. As far as most real estate is handled through auction. We just happen to take a liking to the high end just because it tends to be harder to move traditionally.

You know, Scott, that's an interesting point that you bring up. Why is it that in other countries the auction methodology and there are different types of auctions? We can drill down on that, of course, but generally speaking, the auction methodology is more popular in other markets than it is in the US I have a theory about it, but I'd like to hear your take. Sure.

I think it would be a great idea to trade series on this. My take on this is when it comes to people's investments, and these are usually large investments when it comes to either collections or primary properties or art, and they tend to go to what is best known, what is more traditional. And I personally feel that as a country, we have very traditional trappings, and that tends to be working with the local real estate market. The dilemma that I have found, and that a lot of my sellers have found, is that if you market a property that's $400,000 the same way you market one that's 4 million.

They'Re not apples to apples. You've really got to have some variety in there. And that's where I think auctions come into play. And it actually creates a competitive bidding scenario, which is great in an up market and can definitely be done traditionally in an up market, but maybe not so much in a down market. Does that resonate with what you were thinking?

Well, you know, it does. And I don't know exactly what you meant by traditional, but I think really the difference is the way the US Real estate market runs, with the MLS system being the primary stock exchange, if you will, for real estate, whereas in other countries you don't really have MLS systems, or at least not with the degree of formality that we do in the US and maybe Canada too.

True. And I think some of the uniqueness you and I have probably seen in the media, just the dilemma with the National Real Estate association and Also Zillow and Trulia and some of these other websites that really are making real estate more accessible to the masses, regardless of the price point. I think there may be a paradigm shift that obviously is involving our demographic of auctions as well.

Tell us about that.

Well, as far as we now are, we are now, I feel now, last three to four years, we've received more and more phone calls from sellers who did not even go the traditional route with realtors. They basically said, look, I don't want to go through that process. I'd much rather just get a call to action and get closure on this in my timeframe as opposed to waiting for the market to come to me. But also, and kudos to those brokers and agents who I feel definitely see this as an opportunity. We're not here to supplant the real estate, the traditional real estate industry as far as traditional listings. We're here to actually be an arrow in their quiver as far as a way for them to expedite the sale for a client of theirs that may be languishing. And so we've received more and more calls over the last few years directly from brokers who want our assistance in collaborating with them, not against them or to supplant them, as I mentioned.

So what is your take on the high end real estate market? Is it getting better? Is it getting worse?

I don't think it's getting worse. I think it is getting better because we have seen more interest in the properties that we have been marketing and we do global marketing for our properties and we have seen greater interest and also I think greater capture rate. As far as, okay, what were you able to achieve at auction and how did that compare with what the properties were listed for? And ebbs and flows because as I mentioned, some properties are in very desirable resort destinations, be it Naples or Charleston, Nantucket or Vail or Aspen, and others are primary residences in a lot of other major cities around the US like Chicago, Atlanta, Charlotte, Dallas, etc.

So it's so hard to tell and so hard to say, is the market getting better or worse? And mostly it's getting better. I think people would agree with that. The last couple of years have been pretty phenomenal, frankly. Most people would say, I would say that, but there's so many stratifications. You've got to segment the market in so many different ways. So as we're talking about, you know, talking about markets, you know, there's, you've got to segment by price, you've got a segment by geography, you've got a segment by housing style, all sorts of things.

I think one thing that was at least interesting, even though we don't do sales or auctions of new construction, we have seen in a lot of the cities that we've been acting with a plethora of new larger homes in very high end areas of the cities that we've worked in under construction. And that's something that we haven't seen from my perspective in years. And so that's encouraging.

I think that's the best response I can give is it's encouraging.

Yeah. Well, talk to us about how people buy. When they buy through an auction with you, are they all cash buyers? Are they financing?

When it comes to real estate, they can do either. The majority of them are cash buyers. They can do financing. However, we make the strong recommendation since it is a non contingent, whereas as is sale, that they have their ducks in a row when it comes to financing because they are responsible for the down payment that is held till closing.

Do they have to pay a premium? I mean, what's the process? A buyer's premium, as they call it?

Yes, they do have to pay a buyer's premium. That is correct. And for Heritage, for our high end low three real estate auctions, it is a 10% buyer's premium and that is paid on top of the high bid. And so our bidders, when they are at auction competing against one another, obviously, obviously have established in their mind an area where they will want to kind of cap their efforts. But I think you and I most likely have participated either in charity or other auctions where we potentially did more than what we thought we were going to. And that's what happens at an auction.

So it's interesting. Just tell us a little bit about the model. If someone is a seller who's listening and they want to list a property for sale with you, is it an exclusive? Right. What is the time frame? I mean, the general idea of an auction is that it's quick. You don't have to tie your property up for six months. You can list it for a couple of weeks, maybe a month. I don't know how long the prep is. But take us through that process that a seller goes through.

Sure. It's a collaborative effort between both the seller, Heritage, our auction division, and also the broker of record to market the property globally and obviously to reach some of those periodicals, whether it's Forbes, Fortune, New York Times, Wall Street Journal, Chicago Tribune, and also their international counterparts. Those have marketing lead times that we have to be respectful of. So you are correct in your assumption that it is a tighter timeframe that we can help sellers reach fruition. And it's usually about 75 to 90 days, cash in hand. And the reason why we set up those parameters is because the lead times that are necessary to do the marketing that we know will get the property, the exposure that it hasn't received is usually about that time. It's usually about two months out or so. And so really the entire process is about 75 to 90 days. And what we found is that it typically costs them less to auction their property than to market it traditionally with just the broker realtor arrangement.

So it costs them less. And what do they pay? The buyer pays a 10% premium. What does the seller pay?

The seller pays primarily half of the marketing that we put forth. So for example, a lot of the periodicals that I just mentioned to you are not inexpensive to advertise in. And so we've had marketing campaigns anywhere from $80,000 all the way up to $150,000 for properties that really want to be marketed internationally. Both our sellers and Heritage have skin in the game in the sense that we both bear those costs and those are split with the seller and then recouped by the seller after auction. And so really the only out of pocket that the seller has is the responsibility that they have fiduciary to their broker as far as the broker of record on the listing side. So it primarily cuts their cost in half as far as the traditional versus the traditional method.

And so it kind of begs the question, and forgive me, because I'm just going to be a little skeptical here, but I appreciate that as an outsider, doesn't it beg the question of if a buyer's paying 10% if the seller is paying half of the marketing costs? And I realize that many times luxury broker will have the sellers go in on the marketing cost rather than just charging a, you know, maybe a 6% or whatever is negotiated. Of course it's not fixed by law. I need to say that commission rate. But you know, and the seller will become a partner and pay for part of that marketing expense. But how can it be a good deal for both? I mean, who's getting the better deal at auction? Is it the buyer, is it the seller? Or is it really a win win all around or is it the broker?

Well, first and foremost it has to done, right? And so that's why I mentioned that it's definitely a collaborative effort. Our most recent auction in Houston, the sellers were looking for trying to achieve 2 million as their high watermark for the auction. Once the gavel came down and they went to closing and we actually achieved 1.98 million for them and it closed in 10 days. We had contracted to close in 30, but both the buyer and the seller were able to agree that they wanted to close sooner than that. So we had both a happy buyer and a happy seller in that scenario. And that's what we traditionally like to pursue. We probably receive about 20 or 30 inquiries a month, but we only take about 18 to 20 properties to auction a year. So there's a high attrition rate. Not every property is suited for auction and we really try to take the seller's best interest in mind and giving them the best advice because it really is just that it's a business decision.

Okay, good, good. Well, what else should we know or what else do you want to say as we just wrap up here?

Well, I think hopefully I've been able to convey that when a seller decides to auction their high end residential property with heritage, it's not an act of desperation or as a last ditch effort or a fire sale. My words, not yours. I have found from feedback from our sellers that it's more an act of tact and savvy because they're basically moving their property through the market quicker than all the competitors and peers that they may have around them. And if that is enticing to anyone or they know someone who has been trying to sell but unable, that really is the type of client that we're looking for that's willing to explore something a bit outside that traditional box that you and I were mentioning earlier.

Well, Scott, first, this has been very interesting. Tell people where they can find heritage auctions and I'll learn more about you.

Excellent. Yes, our website is ha.com that's heritageauctions.com and you can directly contact our group@luxuryestatesha.com Fantastic.

Ha.com, super easy domain name and thanks for joining us Scott.

Thanks for your time. I greatly appreciate it.

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