The Tranzon Auction Leader

Quarterly Newsletter - Summer 2006

The Tranzon Auction Leader is published quarterly by Tranzon LLC, national experts in accelerated marketing and auction sales. This E-newsletter focuses on trends, auction highlights, and expert analyses on how a professionally marketed auction may maximize an asset's value.

The "Boom" is Off the Housing "Rose"

Last issue's housing comment was titled "The Residential Market - The First Winds of the Cool Down". These winds have been well documented in past months and we have begun to see clear evidence of a return to normalcy in a number of previously hot markets. While these conditions may feel like a "bust" to many participants, it is better characterized as an adjustment.

It is important however, not to paint the entire country with the same brush. The regional markets are very different.

The markets experiencing the biggest slowdowns are those that experienced huge booms in the past three years. We have seen coastal property in the eastern U.S. slow materially. The same can be said of higher end residential in the large eastern cities. At this point in the slowdown, we are seeing activity decrease, supply increase, and days on the market increasing (the time a listing takes to sell). We have not seen widespread decreases in selling prices yet, although we expect this to come in some of the markets that experienced strong price increases.

Here are select comments from our member companies:

In Florida, the market is slowing somewhat. Sales are still brisk in most areas, but lenders are getting more conservative, which is impacting demand from developers and investors.

The big news in real estate in the much talked about Greater Washington, DC residential real estate market is the dramatic increase in inventory of homes and the amount of time it now takes to get an acceptable contract (from 15 days in April 2005 to 55 days in April 2006). Sellers were accustomed to their homes selling in two weeks. Now, when it takes two months, they start to panic. The reality is that a 60 – 90 day marketing period is a "normal" market. However, some sellers are moving to the auction process because they bought another home, took out a bridge loan thinking their first home would sell immediately, and now they are making two payments a month and struggling. Since the seller has already pulled out their equity and closed on their new home, they just want to "get out" from under their first home, and the auction process is working for them to do that.

Residential trends are less dramatic in other parts of the mid-Atlantic. Days on market are increasing, as are inventory levels. As a generalization, the slowdown has hit higher end properties harder than more affordable property. As widely reported, we are also seeing higher levels of cancellations among buyers that are impacting developers and builders adversely. Sellers in the mid-Atlantic are more receptive to the auction method of selling in this environment and auction inquiries are up. Most markets did not experience a "boom" like the Washington DC residential market. Therefore, the adjustment to normalcy is and will be less severe.

The West coast is a different story as housing continues to be strong in the Pacific Northwest. The California coast looks to be slowing in activity but limited supply has apparently kept pricing strong.

We are seeing a back up in the condo market, which has been documented in sales statistics. Sales are down and supply is up. The San Diego condo market, the hottest in the country a short time ago, is now plagued with over-supply in the face of reduced demand. We have also heard anecdotal evidence of significant condo supply (and reduction in demand) in other "hot" markets.

Condo conversions of apartment buildings and hotels have slowed materially in Florida. For example, the Orlando market for resort condo/timeshare units is almost at a standstill due to over-building and lower absorption rates.

Many areas in the center of the country never experienced the housing boom. So they are spared an "adjustment" to normalcy. On the other hand, skyrocketing energy prices are creating significant wealth and we are seeing strong housing markets in Houston and Dallas, among other areas in the energy belt. The impact of last year's hurricanes, and the resulting construction activity and demand for new or replacement housing is also buttressing the economy in many gulf locales.

Investor purchase interest is down in previously hot markets. As one broker indicated to us in the once blazing hot Outer Banks (NC) market, investor interest is down to less than half of what it was last year. Time on market is extending more toward historical norms. Markets that were heavily reliant on investor demand, such as the Florida condo conversion market, are seeing reductions in demand.

In the District of Columbia, the "condo frenzy" of the past two years has come to a head and buyers are sitting on the sidelines. We have heard from multiple investors that they would not be surprised to see condominium conversion developers to start selling at auction their vacant units. Some buildings are sitting with 30% to 50% vacancy with little to no activity. At the end of April 2006, there were 1,640 condominiums on the market.

Unfortunately, the MRIS system does not break out the DOM for condominiums, but for the overall residential DC market, it has gone from 36 days to 53 days. Our estimate is that there are a plethora of condominiums on the market at least 100+ days, with little to no sale activity.

Again, pointing to our thesis that national generalizations are misleading, we are seeing the condo markets in the mid-South and mid-West regions holding pretty steady.

Investor Activity Has Declined in the Residential Markets. Owner interest in our residential markets has stayed strong but investor demand seems to have waned. Because many "investment properties" in hot markets do not generate enough operating cash flow to cover operating expenses and the cost of capital, investors have relied on double-digit appreciation to provide their returns. With appreciation expectations in the next few years diminishing, investors are seeing that the numbers do not work on new purchases or many current properties they are holding. These factors are leading to both a reduction in demand from the investor sector and an increase in selling activity from short-term investor-owners.

Buyers May Stop "Stretching" So Far. Another fundamental change in the housing market is the potential reduction in the use of mortgage products that allow a consumer to reduce debt service and purchase more home such as interest only loans, negative amortization loans, and option ARMs. Regulators have expressed concern about the proliferation of these products.

Similar to the investor phenomena above, a good deal of the rationale for "stretching" consumer's wallets in the housing market was the expectation of strong appreciation. You can justify some negative amortization or the potential of a significant bump in debt service after a few years if you believe that the value of the residence will appreciate smartly. As this expectation adjusts to a slower growth reality, the willingness of consumers to undertake such loans should diminish.

The Market Reverts to More Normal Conditions. In our last issue of The Auction Leader (available at www.tranzon.com), we detailed factors that will characterize a return to normalcy in the housing markets. These items are playing out as forecast. We would only reemphasize that the adjustment period will extend into 2007. It will not happen overnight. And the severity of the adjustment, or if there is any adjustment required at all, will depend on the individual markets.

To repeat, the adjustment we forecast will result in the following observations over the near future:

• Sales price increases will moderate or stagnate.
• Time on market will lengthen.
• The percentage of homes put up for sale that actually sell will decline as those sellers drawn to the market by escalating prices will withdraw their properties from the market once the slowdown is accepted as reality.
• Auction companies and traditional real estate companies will need to pre-qualify private sellers much more closely to ensure they have realistic sellers with which to work in the changing price environment.

We are seeing these adjustments in many of our markets and the national statistics are reinforcing these observations.

The Commercial Market- Still Rockin', Still Rollin'

On the commercial side we are not seeing much change in the market. It still remains quite strong in most categories and our commentary is not materially different than that of our first quarter report.

In most geographic markets we continue to see demand exceeding supply and strong prices being offered for income producing, commercial property. There appears to be moderation in demand for more speculative properties (vacant property or properties with major issues that can be expected to impact cash flow) and lower quality farm acreage.

The adequacy of acquisition and rehabilitation capital in the markets has led to continuing success for those selling commercial real estate via Tranzon auction. Last quarter we noted the beginning of a trend to tighten lending standards, which was beginning to impact the participation of the marginal buyer in this market.

This said, the continuing strength of demand for income producing commercial property and well located development and quality farm land at auction has been somewhat surprising to us in light of rising short-term interest rates and the moderation in the residential markets. It continues to be a great time to sell commercial property and land at auction.

Energize Your Property Listing

Do you have a property that has been offered for sale for over six months with little or no buyer interest, or a property for which one or more sales contracts have failed to consummate?

Do you need to sell your property within the next three months?

If you answered yes to either question above, you owe it to yourself to investigate offering your property utilizing Tranzon's accelerated marketing services.

Tranzon has had success in selling "old age" inventory and injecting new energy into stale listings. All of the sales below occurred via an intense auction marketing campaign that culminated in a live or sealed bid auction.

1. A vacant office building in a mid-sized, slower growth locality on the market for one year with no offers sold for $425K via Tranzon marketing efforts.
2. An executive home owned by a financial institution. The home was not 100% completed. Home was conventionally listed for over one year with no success. The property was sold "as-is" for $600K at Tranzon auction.
3. A closed gas station, convenience store, on the market for months, sold at a Tranzon foreclosure auction for 10% higher than the previous listing price.
4. A 22,500 square foot office building was listed with a major national commercial RE firm for over one year with no written offers. The property sold at Tranzon auction for $1.05 million.
5. Exclusive mountain residence in exclusive Utah resort city sold using a hybrid sealed bid auction method for $2,354,000. This property had been listed conventionally for over 14 months. The auction marketing generated 247 inquiries and nine bidders.
6. Lake Resort & Marina sold at Tranzon auction for $1,182,500. It had been listed by two brokers for nearly 19 months.

In these cases, the average period between signing of the listing agreement and the auction date was six weeks.

With the property markets slowing in many regions and time on market extending, a Tranzon auction structured specifically to address your needs is an option worth exploring.

Auctions Can Help Sellers of Condos Sell Quickly in an Environment of Over-Supply

Last month, Tranzon TPC sold three condo properties on one lot in San Diego that were listed conventionally for ten months prior to the auction listing. The sellers were real estate brokers with many years of experience in the business. The first property sold prior to auction for $715K. The other two sold after the auction for $669,500 each. The auction marketing is what motivated the buyers to make the offers... a tough thing to make happen in a condo market where supply is outstripping demand. In San Diego, inventory is up dramatically from last year and demand is down materially. Sales volumes are way off. In this case, the auction highlighted the properties for sale and made them stand out, and sell, among a glut of conventionally listed properties.

Tranzon Goes to the Bahamas!

Tranzon sold a Bahamas property recently that makes for a great story. The home was in Nassau. Tranzon Driggers conducted live auctions in two locations, at the house itself and at a hotel in Ft. Lauderdale. In addition, there were two participating bidders on the internet, one from London and one from Michigan, and there was a bidder on the phone.

Knowing that the ultimate buyer might be from some place other than the Bahamas, Tranzon Driggers structured the sale to take down any barriers to bidding, by making it available online as well as in person in multiple locations.

The auction generated active bidding from all locations and the home sold for almost $800,000 by the time all the fees were included. It had been for sale for three years with only verbal offers for $500K - $600K.

Tranzon Continues to Expand

In recent months Tranzon has brought on a number of new auction professionals:

David Lowry, Dick Lowry and Carl Miceli (and their team) serving the greater Baltimore metro market (MD) under the brand Tranzon American working cooperatively with Tranzon Fox.

Mike and Becky Ghazy established an office for Tranzon Fox in Raleigh, NC.

Jason Weller established a presence in Phoenix for Tranzon working with San Diego-based Tranzon TPC.

Cheri Munn has joined Tranzon TPC in its San Diego market.

John Jackley has joined Tranzon as its new Director of IT and Web Services.

About Tranzon

Tranzon is a unique organization in the real estate industry. We are a real estate auction group founded on the premise that combining the powerful auction selling process with a highly professional organization with national resources, and regional member companies having local market knowledge, offers a compelling value proposition to sellers of real estate desiring to sell their property for the highest price possible in the shortest time possible. The member companies of Tranzon have experience in selling virtually all types of property and our staff includes the most respected names in the industry with backgrounds in finance, law, and accounting to name just a few. Tranzon member companies auction over 1,000 properties every year. Since our founding in November 2000, we have conducted auctions in 46 states and the District of Columbia generating over $700 million in sales proceeds for our clients.

Tranzon member companies are independently owned and operated. References to "Tranzon" refer to Tranzon, LLC, and its member companies collectively.

We are excited about our business and would welcome the opportunity to speak with you directly about our company and capabilities.

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