Auction of New View Homes in San Clemente May Start Trend

In what may mark the start of a new real estate marketing trend for Southern California, a major developer is auctioning 39 new homes on a hill overlooking the Pacific Ocean in San Clemente on Sunday.

Although auctions of condominiums and other new residential properties have become common on the East Coast, Hawaii and in much of the Sun Belt in recent years, they have largely been driven by depressed economies that have dried up the market for real estate.

What makes Sunday’s auction by Dividend Development Co. of Santa Clara unusual, area real estate specialists say, is that neither the company nor the local economy is in bad shape.

What has happened is that the demand for homes in the $350,000-$750,000 range has almost disappeared, forcing builders to hang on to properties longer and eating up profits by increasing their marketing and carrying costs.

Dividend, which has conducted 10 other auctions in the past five years, said it expects to sell all 39 of the three- and four-bedroom single-family homes in about 90 minutes Sunday.

Auctions were common in Southern California in the last big real estate market depression in the early 1980s, said Steve Johnson, vice president of the Meyers Group real estate consulting firm in Corona. “But even though the market has slowed again, we have not seen a resurgence. This one is probably the initial one of a bunch. If they do well, there will probably be more.”

About 250 prospective bidders already have registered for the auction, said Maria Hagen, Dividend’s vice president of marketing.

Hagen said Dividend considers auctions as merely another marketing tool and has conducted them “in really hot markets as well as cold markets . . . it is a way of accelerating absorption. We can sell 39 units in one day and close all the sales in 30-40 days in a market that typically is seeing three or four closed sales a month.”

Thus, even if buyers get the Dividend homes for thousands of dollars less than their stated market prices of $371,000 to $596,000, “we are making all that back by cutting the marketing and carrying costs we’d incur if we were in there for 10 months trying to sell everything the traditional way,” Hagen said. “And we also get to free up our money for other projects.”

Robert A. Hendrickson, director of real estate consulting for the Deloitte & Touche accounting firm in Irvine, said the Dividend auction is more evidence that supply is outstripping demand in that price range in the coastal Southern California market.

“There have been auctions all over the East and along the West Coast,” he said. “But the laws of supply and demand have never worked to demand the technique in Orange County until now.”

Still, auctions can be a profitable marketing tool for developers, Hendrickson said, and “may become more popular here than they have been because there is a belief that the buyers are out there but are just sitting, waiting to be motivated. An auction is one way to motivate them.”

He questioned, however, whether auction buyers really get much of a price break because one reason for an auction is to create a frenzied atmosphere that pushes prices up.

That is underscored in the literature of a major Chicago commercial real estate auction house, JBS & Associates, which moved $100 million worth of property in auctions in 1989.

Richard N. Kipper, real estate partner at the Costa Mesa office of the accounting and consulting firm of Laventhol & Horwath, said JBS officials “have told me that auctions are growing in popularity because they provide a much better gauge of what the market will bear than a lot of other marketing efforts.”

In a brochure promoting its services as auction organizer, JBS tells prospective clients that “a well-prepared and -executed auction creates a sense of urgency in an atmosphere of excitement and competition, in much they same way the investment banking community finesses a market sale.”

Real estate auctioneer Bill Lang of Lang Financial Corp. in Newport Beach said he believes that Dividend is more adventurous than other builders because of its successful past experiences with auctions and that Sunday’s event probably will kick off at least a small boom.

He said he already is working with developers in Riverside and San Bernardino on potential auctions.