The Tranzon Auction Leader

Quarterly Newsletter - Winter 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.

Happy New Year!

To all of our clients and friends, we wish everyone a happy, healthy, and prosperous New Year. Last year was Tranzon's fifth year, and 2005 continued our streak of growth and record results. We are looking forward to more of the same in 2006.

The market continues to validate the need for Tranzon's "local-national" real estate auction service - providing the sellers market with an accelerated marketing solution delivered by dedicated professionals in local and regional markets with the national resources of Tranzon supporting them.

The Fed-Rate Hikes Near an End, Economy Rolling

The minutes from the Fed's most recent meeting signaled that in all likelihood, most of the rate hikes are behind us. The stock market took this to heart with a vigorous rally. Long rates have taken this in stride and have been stable.

While one or two further ¼% rate hikes appears to be in the cards, it is possible that the Fed will pause after this to wait and see if the impact of the previous hikes is manifest in a more sustainable rate of growth and continued benign inflation.

The official inflation statistics continue to show modest price increases outside of energy. While these statistics are baffling to consumers who have seen the price of so many substantial items go up at double-digit rates in the past year (healthcare, gasoline, electricity and heating bills, real estate taxes, housing prices), they are what the policymakers look at to gauge inflation. So the official position is that inflation is contained and not presently a problem.

Our view is that the economy is on solid footing despite the fact that so much about this economy makes people uneasy. There is good liquidity in both the corporate and individual sectors and the U.S. consumer's durability and propensity to spend is awesome in light of debt loads and lack of savings.

We think the only thing that can slow the economy down will be a change in international money flows whereby foreigners stop funding our trade and Federal budget deficits. If that were to happen, and we think it is unlikely, the resultant spike in long-term interest rates would significantly slow the U.S. economy.

Absent this, we think the 2006 economy will surprise to the upside.

The Residential Market - The First Winds of the Cool Down

The long awaited cooling of the residential real estate market appears to be upon us. Although most markets remain strong, the "hottest of the hot" appear to be taking a pause and inventory and time-on-market continues to climb. We believe we are in the early stages of a return to normalcy in the residential real estate market.

What will happen now and over the next 12-18 months is an adjustment in the expectations of both buyers and sellers. This is the classic "Seller-Buyer Disconnect" when sellers look backwards at historic comparable sales as justification for continued higher prices and buyers look forward to the direction of the economy. Hence, buyer expectations adjust much more quickly than that of sellers. This will cause some "stress" in the market over the adjustment period as sellers stick to higher pricing expectations while buyers quickly mark their expectations down to more historically normal levels.

This 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.

In the hottest residential markets we work in we are seeing clear signs of the moderating trends. Auction inquiries by potential sellers are up markedly as are residential property offered for sale by auction by private owners. The two most common private owner situations we are seeing are:

• Carrying of two homes and needing to sell because of their inability to continue paying two mortgages.
• Private owners turned investors trying to make money in the real estate market but having mistimed the market. We see this especially with private owners buying new construction and not being able to sell the property because they are still competing with the builder and their interest only mortgage means they can literally not afford to sell.

We will closely follow how these private owners turned investors work through this market and if they will contribute to a downward pricing trend by taking losses to avert their high carrying costs.

The Commercial Market - Historically Low Interest Rates and the Strong Economy Keep This Market Rolling

On the commercial side we are not seeing much change in the market. It still remains quite strong in most categories.

In most geographic markets we are seeing good balance and strong, but not nutty, prices being offered for income-generating, commercial property. Reflecting the improving fundamentals in the apartment sector, we continue to see strong prices paid for apartments going to auction. This can also generally be said about any quality income-generating, commercial property - prices are strong.

Most of the froth has been coming out of this market over the past twelve months as the Fed has been increasing interest rates. We continue to see this as evidenced by more modest prices and muted demand for more speculative and vacant property.

The type of commercial property we are seeing most in our troubled property sales practice is hotels and motels (those that have not kept up with needed capital improvements and franchise improvement requirements over the past five years) and standalone retail (specialty retail buildings whether restaurants, lube facilities, etc.). We also see some troubled inventory of multi-family properties, especially with pre-1975 apartment complexes. With the turnaround in the fundamentals in this sector, now is a great time to dispose of multi-family property via auction.

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

Lending - An Important Trend Begins to Emerge

Tranzon associates are reporting the first hints of what may be the beginning of a cyclical credit-tightening trend. The remarkable period we have just been through characterized by loans made with relaxed guarantee provisions and no or virtually no monetary equity may be winding down. Many of these more loosely underwritten loans were in the form of three or five year balloons or other facilities requiring renewal in the short or medium term. As these rollover, we are seeing financial institutions taking a position requiring more equity or personal guarantees, even on performing, non-troubled loans.

We expect to see more real assets come to the market for sale in 2006-2008 from sellers forced to sell some of their holdings to meet equity or personal guarantee requirements imposed by lenders (or in the case of franchisees, investment requirements imposed by franchisors).

Tranzon auctions are ideal vehicles to meet these seller and lender needs. Auctions are time-definite sales, and the "as-is, where-is", limited contingency nature of the typical auction contract enhances the probability of closing on contracts while limiting required investment in property by sellers.

The Power of Auction Marketing and the Power of Tranzon

A Tranzon auction is a great way to bring excitement to assets that are languishing on the market under conventional marketing methods. In the fourth quarter of 2005, Tranzon member companies had successful sales of "tired" properties that were on the market for some time, garnering little interest, under conventional listing contracts. Properties sold recently that garnered better than expected interest and pricing included development land, shopping centers, an assisted living facility and industrial property.

In an environment where there is plenty of money available to finance real estate and 1031 money chasing deals, continued interest on the part of both institutions and individuals to invest in real estate, and historically strong levels of valuation, the power of auction marketing is something many sellers of real estate should consider.

Combine this with the national buyer database that exposes your property to interested buyers across the country, and the marketing reach and expertise of Tranzon, and you have a potent real estate sales option at your disposal. Tranzon's website, averaging over 40,000 hits per day and listing 75 to 100 auction properties recently, is one of the most viewed real estate auction websites today.

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 among 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 45 states and the District of Columbia generating approximately $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.

CLICK HERE to send an email to request more information on Tranzon or to have Gwendolyn Carnes contact you.

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CLICK HERE to go to Tranzon's home page at www.tranzon.com.

CLICK HERE to request a copy of Tranzon's Brochure, "Selling Real Estate at Auction".

THE TRANZON AUCTION LEADER is published by Tranzon, LLC., 7204 Glen Forest Drive, Suite 105, Richmond, VA 23226. Our toll-free number is 866-TRANZON.

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