Real estate disruptor: How Unreserved is targeting Ottawa with online auctions – Ottawa Citizen

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When Ryan O’Connor began scoping out his next venture a year ago, he knew he had a challenge. His new firm — Unreserved, an online auction specialist — was targeting a real estate industry deeply unfamiliar with this manner of selling.

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Under current rules, enforced by the Real Estate Council of Ontario, brokers representing owners who are selling their homes are prohibited from disclosing details about offers received. The number of bids, yes. What’s in them, no.

Under the province’s enabling act, auctioneers can apply for exemptions. But auction sales historically have been associated with financial distress.

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 homeowners 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 started auctioning them off.

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“That was overkill,” O’Connor said in an interview in reference to the numbers, which included a handful of rental properties. “The second we went live back in July, we got calls from potential sellers. My own houses got pushed to the back of the line,” he said.

Since then, Unreserved has auctioned 101 residences and condos, including 20 owned by O’Connor.  In February, Unreserved conducted auctions resulting in 25 sales — not quite two per cent of the total market.

O’Connor, who raised $34 million in venture financing early this year, is targeting a five-per-cent share of the market in Ottawa, where he is concentrating his main effort. Given the scale of his ramp-up, his company will likely have to do better than that to begin generating profits.

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Unreserved, which is also marketing its services in Toronto, currently employs about 100 and expects to have 160 on staff by year-end. Increased compensation expenses also have to be set against the company’s strategy of charging just one per cent of the selling price. This compares to the industry standard of two to 2.5 percent earned by the selling realtor. (The typical four- to five-per-cent fee generated by a house sale is split between realtors representing the buyer and seller).

Now consider what this 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-per-cent share of that would translate to $650 million worth of transactions for Unreserved, producing roughly $6.5 million in fees annually. Compensation for 100-plus salaried employees would chew that up rapidly, especially considering it will take time to achieve a five-per-cent share. Then there are the expenses of growing the business.

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On the other hand, that’s what the venture financing is for. “We’re building the future of real estate here,” O’Connor said.

That’s the goal. Whether it’s realistic is still unclear.

It’s easy to understand the attraction of an auction from the buyer’s point of view. Ottawa’s resale market has for years been plagued with too little inventory.

Source: Ottawa Real Estate Board

When houses or condos are listed, potential buyers swarm, triggering bidding wars. But, in submitting offers, they have no idea where they stand in relation to competitors, either on price or conditions.

Unreserved’s auction platform allows potential buyers to respond instantly to rival bids. A feature permits non-bidders to observe the auction as it happens. The openness is a tonic for house hunters who have lost out during bidding wars conducted under the usual rules.

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Unreserved’s one per cent fee — which covers advertising, staging and the costs of the auction itself — is also a selling point, but not as big as it first appears. In addition to Unreserved’s fee, the seller of the house often pays two per cent of the house price to the realtor representing the buyer, meaning the full cost is three per cent.

Even that won’t necessarily produce a saving over the usual four- to five-per-cent fee charged by licensed brokers because much depends on who exactly shows up to bid for properties auctioned off by O’Connor’s firm. One prominent Ottawa realtor, who declined to be named, said, “In most transactions, maybe eight per cent to 10 per cent of the purchase price is on the line. If you have a good network and have done your homework, you can do better for your (selling) client than an auction.”

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It’s also the case that politics could undercut some of the attraction inherent in Unreserved’s strategies.

The Ontario government is scheduled to implement changes to the Real Estate and Business Brokers Act this autumn that could allow brokerages to disclose financial details of competing offers at the discretion of the seller. It is expected also to clarify and perhaps narrow the duties of an auction firm to ensure it is doing nothing more than accepting and recording competing bids.

Some realtors would like to see the auctioneer exemption eliminated entirely, arguing that it sets up a system in which unregulated players such as Unreserved, compete unfairly against licensed realtors.

The Ottawa Real Estate Board, which represents some 3,000 brokers, is neutral on the issue of auctions.

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“The Board takes no position about entrants to the highly competitive real estate industry, which is comprised of a variety of business models for consumers to choose from,” board president Penny Torontow noted in an email.

O’Connor, an experienced entrepreneur, intends to move quickly. He is the founder and former key executive of E Automotive Inc., which provides auto dealerships access to a marketplace driven by online auctions. He sold the bulk of his equity stake in advance of the company’s $135.7-million initial public offering on the Toronto Stock Exchange last November.

That gives him the wherewithal to give his auction platform a solid trial run. Whether it works will depend on whether he can convince enough sellers that auctions actually deliver the prices they want. In a market as vibrant as Ottawa’s, that might not be difficult to do.