Maurice Martin
This is the world of real estate auctions, an old practice that enjoys a renaissance whenever the market takes a downturn. Though many people associate auctions with foreclosures, the recent San Simeon auction tells a different story. At that June event, approximately 37 townhomes changed hands—all of them brand-new.
Auctions aren’t about distressed property; they’re about speed. Owners must be eager to shed excess inventory. Buyers must be willing to make quick decisions and forgo negotiations. And of course, it’s the auctioneer’s job to bring those parties together and keep the show moving. At the San Simeon auction, the music that followed each “Sold!” was the theme song to Rocky, Beverly Hills Cop or a similarly peppy tune—anything to help keep energy up. peppy tune—anything to help keep energy up.
CLEARANCE SALE
The National Auctioneers Association reports that from 2003 to 2006, gross sales of residential real estate via auction grew by 39 percent to $16 billion nationally. During the same period, gross sales by auction of commercial and industrial real estate grew by 27 percent to $15 billion, while land and agricultural real estate sales grew 33 percent to $25 billion.
But talk to those with a few decades in the real estate business, and you hear that it’s all about cycles. "The last time we saw a significant number of real estate auctions was in the downturn of the 1970s and 1980s," says Alan B. Levan, CEO and chairman of Levitt Corp., the parent company of Levitt and Sons, developers of San Simeon. "Auctions have a way of energizing people. In this environment, you sell for less but move a lot at one time."
All 54 units that Levitt and Sons put on the block had previously been under contract—and each contract fell through. Multiply 54 by the monthly overhead that comes with unsold property and by the number of months it might take to sell through a realtor, and you begin to understand the company’s decision to go with an auction. "We wanted to move a lot [of these properties] as quickly as we could, so we could go back to selling our other inventory," says Levan. "It’s not much different than a retail clearance sale, where a store clears its inventory for the new season."
As every bargain hunter knows, a clearance sale means lower prices. Homebuyers can leave an auction with a sweet deal, provided they keep a cool head.
"We held back at first," says Lorrie Johns, who attended the San Simeon auction with her husband. The auctioneer’s patter and the rapid rise in numbers can be intimidating. And with dozens of properties on the block, you might find yourself bidding on a property sight unseen.
In this regard, Johns has an ace in the hole. "My sister works for Levitt and Sons," she says. That and a husband in the construction business gave her more confidence.
For those who don’t have insider connections, auctions can be more daunting: They do not provide the same buyer assurances as sales through a real estate agent. What if, after buying a home at auction, you find your beautiful granite countertop cracked, or a family of termites in your joists?
"There’s no opportunity for correction," says Gloria Tate, a realtor with Raso Realty in Cape Coral. For this reason, Tate has never participated in an auction and has no plans to.
Bill Roye, president and owner of United Country Bill Roye Realty & Auction, acknowledges the lack of recourse, but frames it differently: Buyers must accept responsibility for due diligence prior to an auction. "Most firms have the property available for inspection [in advance]," he says. His company does this and also hires its own inspector, whose report is bundled with other information into what he calls a property information packet, or PIP. Buyers then have a choice of trusting the PIP or having their own inspection done.
Getting buyers to jump in with both feet is the auctioneer’s job. Troy Ayers, president of Premier Real Estate Auctions, says that in this effort the media has not been an ally.
"Buyers are scared. The radio says [the real estate market] is horrible in Florida," says Ayers, whose Fredericksburg, Va.-based company has an office in Marco Island. "But put a group of buyers together and there’s a comfort level, and on a slow day, one of our auctions will generate 15 buyers."
Sellers’ growing appreciation of this is driving the demand for auctions, says Ayers. His company, which sees more demand for residential than commercial real estate auctions, not only organizes the auction on behalf of the seller, it also handles marketing, which often accounts for 4 percent of the sales price in an auction. But to a seller who’s been sitting on a property for years, getting buyers in the mood to buy is worth the overhead.
STAGING THE DEAL
Because buyer nervousness can sink a deal, Sperry Van Ness/Fisher Auction Co. worked hard to reduce it when staging the San Simeon auction for Levitt and Sons. The effort began long before the Fisher Auction staff donned their white carnations on the day of the sale. The company staged two seminars, during which potential buyers visited the auction site, reviewed terms and conditions, and even took part in an auction demonstration.
"We don’t just want to sell the property," says Fisher Auction principal owner Louis B. Fisher III. "Our goal was to have well-informed buyers."
Fisher points out that one category of buyers has always been comfortable with auctions: "Think about auctions for horses, wine, artwork," he says. "Wealthy people know that the process works." High-end buyers are drawn by the same thing as everyone else: the prospect of a bargain.
Indeed, when the gavel swings their way, high-end buyers stand to save even more than the average Joe. In March, John Sullivan bought a home in Olde Cypress, a gated community in Naples. He paid approximately $750,000 on a home that was appraised at $950,000. He says that the previous owner needed to free up a lot of cash quickly.
Which is not to say that auctions are a bad deal for the sellers. Roye says one of the advantages of an auction is the potential of a higher sale price. "In March, I auctioned a property in Golden Gate Estates. The sellers would have been happy with $500,000. The property went for $715,000."
But that’s a potential—the nature of an auction precludes a guarantee, either for buyer or seller. Sometimes homes sell for more than list; other times, less.
Tate says there’s more on the line than price, however. "Putting a house up for auction puts a stigma on it," she says, and her opinion is shared by a number of realtors. "If it doesn’t sell at auction, the seller now has to move forward burdened by that stigma."
Tate has heard of auctions that, because of ineffective auctioneers, have left lots of properties on the block.
Roye has also heard of disastrous auctions, but he says the solution is to go with a properly certified auctioneer, one who will get eager buyers into the room and make sales happen. And for sellers eager to move property, he says all the risks are worth the opportunity to move the property that much faster. "Would you rather have $20 today or $25 a year from now? There’s a time value for money."
When that time value is important to a seller, an auction can leave all parties satisfied. "I don’t want to say that everyone gets a bargain [at an auction]," says Sullivan about his purchase in Olde Cypress. "But it worked out well for me. I got a nice home at a fair price."