When Ryan O’Connor started considering his next venture a year ago, he knew he had a challenge. His new company – Unreserved, a specialist in online auctions – targeted a real estate sector deeply foreign to this mode of sale.
Under current rules, enforced by the Ontario Realty Council, brokers representing homeowners selling their homes are prohibited from disclosing details of offers received. The number of offers, yes. What’s in it, no.
Under the province’s enabling legislation, auctioneers can apply for exemptions. But auctions have always been associated with financial difficulties.
In order to get his business off the ground, O’Connor needed to show that auctions could produce satisfactory offers for sellers. But finding ordinary owners willing to take a chance on a little-used concept was difficult.
So last spring, O’Connor purchased 25 Ottawa properties through a personal holding company, Cars 4 Cost Plus 499 Inc., and began auctioning them off.
“It was overblown,” O’Connor said in an interview referring to the numbers, which included a handful of rental properties. “The second we went live in July, we got calls from potential sellers. My own houses have been pushed to the back of the line,” he said.
Since then, Unreserved has auctioned off 101 homes and condos, including 20 owned by O’Connor. In February, Unreserved held an auction that resulted in 25 sales, not quite 2% of the total market.
O’Connor, who raised $34 million in venture capital earlier this year, is aiming for a 5% market share in Ottawa, where he is focusing his main efforts. Given the scale of his rise to prominence, his business will likely need to do better than that to start turning a profit.
Unreserved, which also markets its services in Toronto, currently employs about 100 people and expects to have 160 by the end of the year. The increase in compensation expense must also be weighed against the company’s strategy of charging only one percent of the selling price. This compares to the industry standard of 2-2.5% earned by the selling real estate agent. (The typical four to five percent fee generated by a home sale is split between the realtors representing the buyer and the seller).
Now consider what that means in the Ottawa market, which last year saw more than 20,000 residences and condominiums change hands for gross proceeds of more than $13 billion. A five percent share of that would translate to $650 million worth of transactions for Unreserved, yielding about $6.5 million in fees per year. The remuneration of more than 100 employees would increase rapidly, especially since it will take time to reach a five percent share. Then there are expenses related to growing the business.
On the other hand, that is what venture financing is for. “We are building the future of real estate here,” O’Connor said.
That’s the point. Whether this is realistic is not yet clear.
It’s easy to understand the appeal of an auction from the perspective of the buyer. Ottawa’s resale market has suffered for years from insufficient inventory.
Source: Ottawa Real Estate Board
When houses or condos come up for sale, potential buyers swarm, sparking bidding wars. But, by submitting offers, they have no idea of their position compared to competitors, either on price or on conditions.
Unreserved’s auction platform allows potential buyers to instantly respond to competing bids. A feature allows non-bidders to observe the auction as it unfolds. The open is a tonic for house hunters who have lost in bidding wars fought by the usual rules.
Unreserved’s one percent fee – which covers advertising, staging and the costs of the auction itself – is also a selling point, but not as big as it sounds. At first glance. In addition to Unreserved’s fees, the home seller often pays 2-2.5% of the home price to the real estate agent representing the buyer, which means the total cost is 3-3.5 %.
Even that won’t necessarily produce a saving over the typical four to five percent fee charged by licensed brokers, as it all depends on who exactly shows up to bid on the properties auctioned by the O’Connor Company. A prominent Ottawa real estate agent, who declined to be named, said: “In most transactions, about 8% to 10% of the purchase price is at stake. If you have a good network and you have done your homework, you can do better for your customer (seller) than an auction.
It’s also true that politics could undermine some of the inherent attraction of Unreserved’s strategies.
The Ontario government is expected to implement changes to the Real Estate and Business Brokers Act this fall that could allow brokerages to disclose financial details of competing offers at the discretion of the seller. It is also expected to clarify and perhaps restrict the duties of an auction company to ensure that it does nothing more than accept and register competing bids.
Some estate agents would like the auctioneer exemption removed entirely, arguing that it sets up a system in which unregulated players such as Unreserved compete unfairly with licensed estate agents.
The Ottawa Real Estate Board, which represents some 3,000 brokers, is neutral on the issue of auctions.
“The council takes no position on entrants to the highly competitive real estate industry, which includes a variety of business models from which consumers can choose,” council chair Penny Torontow noted in an email.
O’Connor, an experienced entrepreneur, intends to act quickly. He is the founder and former key executive of E Automotive Inc., which provides car dealerships with access to a marketplace powered by online auctions. He sold most of his stake ahead of the company’s $135.7 million initial public offering on the Toronto Stock Exchange last November.
This gives him the means to give his auction platform a solid test. Whether it works will depend on its ability to convince enough sellers that the auctions are actually offering the prices they want. In a market as dynamic as Ottawa’s, this might not be difficult to do.
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