Real Estate Auctions Thrive
Quick and profitable way to unload property
CHICAGO — GREGORY and Gayle Gelman didn't really expect to buy anything at a recent real estate auction in Flushing, N.Y. The first in a series of identical condos brought $185,000. That was far more than the $150,000 ceiling that the couple, Jewish refugees from the Soviet Union who arrived in 1989, could afford to offer. ``I thought [participating in the bidding] would just be an exercise,'' Ms. Gelman says. But each winning bid was lower than the previous one. The Gelmans ended up claiming the ninth condo for their price.
Stories like these help pack real estate auctions that have proliferated nationwide. But if buyers make a killing, where does that leave sellers?
According to auction company representatives, sellers do so well that auctions ought to be the sales technique of choice in many non-distress situations.
``When people think of [real estate] auctions, they think of bankruptcy, foreclosure,'' says Donald Hannah, president of USAuctions in Stamford, Conn. But when it comes to selling art, the venue of choice is an auction house like Sotheby's, he says.
Of course, the price trends for a Van Gogh and for a condo in New England are dramatically different. But this makes no difference, says Steven Good, president of Sheldon Good & Co. ``Our company's strategy has been to use soft markets here to prove that auctions work.'' The Chicago firm leads the nation in real estate auctions, measured in dollar value. Australian example
Both Mr. Good and Mr. Hannah point to Australia, where in the best of times sellers choose to auction their homes in order to get the highest price. Homes sold at auction brought a sales price 6.5 percent higher than those sold through private listings, according to a study of the Australian market sponsored by the National Association of Realtors.
Hannah sees three categories of estate auctions:
Foreclosed properties sold by financial institutions and government agencies.
The emerging market - builders and developers that use auctions as an accelerated marketing tool. By disposing of an inventory of slow-moving property, they cut carrying costs - insurance, interest, maintenance - and can pass on the savings to buyers. ``On a present value basis of my dollar, I can come out ahead and give you a discount,'' Hannah explains.
The third market will be ``the resale of your home and my home.'' When accepting a new listing, a broker would ask the seller to consider an auction and set a realistic price. If bidding does not reach the sellers minimum price, no sale occurs.
Noting that ``there are 260 million people to educate to this process,'' Hannah wants to start a pilot program next year in which indiduals would put their homes up for auction to demonstrate that this method works.
Today, it's the second market that USAuctions and Sheldon Good & Co. primarily serve. An example would be the developer of 100 condominiums who has sold 60 and now wants to quickly unload the rest.
``Carrying costs are 2 to 3 percent [of property value] per month,'' says Good. ``The moment a developer or owner of a significant piece of property thinks it's going to take six to 12 to 18 months, the auction becomes very attractive.''
Auctions without houses
Developers can also use auctions to sell properties before they are built. That enables them to qualify for financing, which can be nearly impossible to get in the wake of stricter government regulation of lending institutions.
Hannah is conducting one such ``blueprint auction'' of 10 model homes and 32 future homes for a builder in Belvedere, N.J. ``If he can walk in with 32 contracts, he can get financing.'' As auctioneers, USAuctions (which works in cooperation with Prudential Realty Group real estate offices) and Sheldon Good & Co. have to ``make the market'' by attracting bidders. When advertising the sale, maintaining a quality image is ``a matter of gargantuan proportions'' to builders who have a continuing presence in a community, Good says. ``The idea of presenting the auction in a way that is not repugnant to the market is very important to our clients.''
And people readily buy because auctions show value, Good says. ``Those bidders that win feel comfortable knowing that someone else would have bought the house they bought for [only] $500 less than they did.''