Asset Management Associates
Avoid Being Disillusioned by Asset Disposition
by Michelle Vervake
The desire to gain more control over asset disposition, recovery costs, and perceived low net remarketing expenses, appear to be the driving forces behind lenders bringing the asset management function in house. There are times, however, when outsourcing is still most beneficial.
In fact, whether it is through the original equipment vendor, an asset management service provider or auction house, third party involvement is a necessity.
We all agree, the best recovery is a financial workout, but when the attempt to do so has been exhausted and payment history is worsening, involving a third party partner has proven to be successful in many ways. One alternative is working with the original equipment vendor. Many lenders have contractual agreements with vendors that give them first right to purchase or sell the off-lease or defaulted equipment. These relationships are a win win if everyone is doing their part.
The equipment dealer should be channeling their new and used equipment financing opportunities to their lender partner, and in return, the dealer is in first position to receive the off-lease or defaulted asset. This provides the dealer with a flow of pre-owned equipment to resell.
A good vendor partner will have excellent communication with the lender, providing them with a detailed condition report, pictures and estimate to repair critical items. If the dealer does not purchase the asset from the lender, before a work order is opened, discussions on whether to repair the asset need to occur. This way the lender can make an informed decision on whether repairing the asset pencils out to be the best ROI, before they spend a dime.
The equipment dealer/vendor should advertise and make their sales force aware of this inventory so that it does not collect dust in a corner somewhere. Obviously, dealers have their own inventory to move and manufacturer’s market share to satisfy, so a lot of times, bank owned assets become second priority or even forgotten about.
Another option would be to utilize a service provider whose main focus is assisting lenders with their equipment needs. Some of the benefits of using this type of service include strategies such as involving the asset manager at first signs of payment delinquency. Often times, early involvement with the lessee, from an empathetic angle, allows for development of rapport and trust. They usually know that repossession is in their future, and by taking this approach, the repossession process is much smoother and less costly with a more optimistic result.
An unbiased opinion of asset value for appraisal purposes is recommended. In addition, because these are equipment experts, the ability to keep cost of recovery to a minimum is more likely. The proper steps in advertising and selling for the best possible price are taken, thereby, proving commercially reasonable sale.
Some adversity to using a third party asset management service stems from the perception that these are fly by night, make a quick buck shops. It appears that these type shops are a thing of the past, or should be. Be sure to qualify who you partner with by making sure they carry proper/enough insurance for bank owned assets. Accurate accounting and reporting of expenses, time and fees should be explicit in their settlement statements. Ad clippings, bids and sales leads from the advertising campaign need to be forwarded upon sale as well. Certain asset types such as restaurant equipment, large office facilities or coin operated laundries may require a different approach when it comes to disposition. In these examples, you must find an asset manager that will perform due diligence to discover the liquidation value, cost to remove and storage costs. A comparison of the net liquidation result to the fair market value in place will aid in a lenders decision on how to proceed with disposition. Certainly, time is a huge factor in these types of situations. If time is of the essence, public auction may be the best course of action.
According to Ritchie Brothers, public auction disposes of more used equipment than any other alternative. In recent years, more in house asset managers have teamed up with auctions such as Iron Planet, TruckCenter.com, Copart and Ritchie Brothers as their disposition solution. These auction houses have contracted with lenders offering “special commissions”. Depending upon the type of auction and what you are selling, auction commissions can range from 10% – 25%. The “special commissions” are negotiated lower than this relatively. These commission rates could be higher because of the auctioneer’s ability to charge an additional buyers premium. Be aware that in some instances, these lower commissions are often balanced by high transportation costs or other charges to make your asset “auction ready”.
Public auction has many benefits. The unreserved menu – no minimum bid and no reserve prices results in guaranteed sale to the highest bidder. Obviously, this can also be a negative. If the asset has been entered into the auction at a late date and has not been justly advertised, the right audience may not be gathered on auction day. Simple things such as poor weather could also adversely affect your chances for a good return as well.
The retail sector and secondary market feel the effects when a lender has taken a fleet of like equipment to auction. The market for that equipment drops overnight and may be affected for months, or even years. The lender’s driving factors to use auction such as time, logistics, and paperwork are well understood. However, alternatives are available which might impact net recovery by additional 20% to 30%.
In conclusion, the trend is to assemble an asset management team and create an equipment management department within lending institutions. However, depending upon the situation, the asset category, and many other variables, it may remain beneficial to outsource a portion of the assignments based upon the reasons outlined above.
When partnering with a third party asset management service provider, it is important to find an affiliate with a good reputation that has the qualities to represent your firm as if they were an extension of your own team. Utilizing a firm that possesses a diverse equipment background, broad industry contacts and proven marketing and sales experience will keep your inventory turning.
Last but not least, partner with someone you trust. When in the depths of the recovery and negotiating processes, split decisions need to be made on your behalf. Trusting that your asset manager has your best interest in mind makes for a long term relationship with optimal recoveries.