Auctions’ appeal grows with builders’ inventory
Allison Kern, a 25-year-old accounting clerk living with her parents, was convinced she couldn’t afford her own home in Southern California.
Yet, in less than two frenzied minutes on a recent Saturday afternoon, she became the happy owner of a new two-bedroom condominium in Aliso Viejo at a price she could bear. Braving a crowd of 300 other bargain hunters at a new-home auction, Kern wound up paying 18% below the original list price.
“It was a little scary because it went so fast,” said Kern, whose winning bid was $394,000. “This was such a great opportunity to get a good deal.”
Last in vogue during Southern California’s previous real estate downturn in the early 1990s, auctions at new-home communities are gaining steam again as builders look for ways to move their merchandise quickly in a sluggish market.
For buyers like Kern, these auctions are indeed often an opportunity to get a deal. Yet the auctions also can benefit real estate developers struggling to close deals with buyers the conventional way.
More often associated with foreclosed properties, auctions tend to draw ready, willing and able buyers who delight at the chance to snap up what they believe will be a bargain.
“If you want to stimulate the marketplace, that’s what an auction does,” said Todd Wohl, vice president of Premiere Estates Auction Co. in Manhattan Beach.
Sares-Regis Group, an Irvine-based developer whose Aliso Viejo condos were auctioned to Kern and other buyers, was able to unload 30 units in one afternoon and avoid piling up losses on its 344-unit development that was still half complete.
“With the auction, we had the market set the price,” said Ed Eyerman, Sares-Regis’ vice president of sales and marketing.
The Sares-Regis auction in mid-October was “the first big event” at a new-home community in the current real estate cycle, said Rhett Winchell, head of residential auctions at Beverly Hills-based Kennedy Wilson, which has been arranging auctions for 20 years. But it won’t be the last, he said.
“A lot of builders are considering it and a lot more are coming,” he said.
These auctions are well suited for developers of new-home communities because a surge in unsold new-home inventories is one of the chief earmarks of the current housing slowdown. The supply of unsold homes in all stages of construction has tripled in the last year, data show.
For developers, getting saddled with unsold units drags down the bottom line. So selling off a slew of units at once makes sense, even if it cuts profit margins in the short term.
During the recent housing boom, builders’ profit margins often ballooned to 30% or higher on new-home sales, although in more typical real estate cycles, margins have hovered in the low to mid-teens.
“They can eat it now but then look ahead to the future,” said Patrick Duffy, a managing director at Costa Mesa-based industry research firm Hanley Wood Market Intelligence.
That indeed was the thinking of Sares-Regis Group executives in deciding to use an auction. More than a year ago, it thought it had a no-lose project when it began converting a massive apartment complex in Aliso Viejo into an upscale condominium community. After all, the real estate market was accelerating and condos in particular were going like hotcakes.
Yet after selling the first 152 at or above their asking prices, the company found itself in the middle of a housing slowdown -- and it still had 192 units to finish renovating and release for sale.
Cutting prices on subsequent phases would seem like the natural thing to do. But if the company drops the prices of one phase, prospective buyers may wait to see whether it will do it again on the next, company executives reasoned.
“Our goal was to not let buyers chase the market down,” Sares-Regis’ Eyerman said.
The company instead wanted to see how far buyers might drive prices up. So it reset the price to $295,000 on 30 condos that had been languishing for months, then invited interested buyers to an Orange County hotel to bid.
Sares-Regis sold off all the units at an average selling price of $401,000, a 15% discount from where the company had tried to sell its units before the auction.
For Matt Fleischman, the auction provided a chance to become a first-time homeowner in a community he figured was well out of his reach.
The 24-year-old mental health therapist, who lives with his parents in Westminster, had been diligently looking for a place to buy in Aliso Viejo for several months. But with the median home price in the mid-$500,000s, he was unable to find anything within his price range. So he was determined to bid on every condo put up for auction by Sares-Regis.
Fleischman’s persistence paid off. He ended up with a two-bedroom condo for $410,000 -- his upper limit.
The auction “was attractive because I could set the price,” the slightly stunned Fleischman said as he was about to sign closing documents within minutes of landing the winning bid.
Winners had to be pre-qualified for a mortgage and be ready to fork over a $5,000 cashier’s check plus a personal check equal to 3% of the purchase price.
For sellers, the results of auctions aren’t always guaranteed.
On Saturday, 15 furnished, landscaped model homes that had been for sale since August were put up for auction at Bressi Ranch, a sprawling new-home community in Carlsbad, Calif., developed by home-building giant Lennar Corp. With prices ranging from $850,000 to $1.4 million, it was considered the largest auction in San Diego County in several years.
But the auction ended without a sale because the seller -- a group of Los Angeles investors -- rejected all bids as too low, according to Great American Group, the Woodland Hills-based liquidator that conducted the auction.
Next month, Huntington Beach-based Bonanni Development will be accepting bids for the last three homes in a tract with sea views where houses last year sold for at least $2 million.
