Builder to Auction 39 Upscale Houses in San Clemente : Real estate: The tactic is being tried because there’s little demand for homes in the $350,000 to $750,000 range. It could be a new marketing trend.
In what may mark the start of a new real estate marketing trend for Southern California, a major developer is auctioning 39 pricey new houses on a hill overlooking the Pacific Ocean 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 a depressed market.
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 are in bad shape.
What has happened is that the demand for houses in the $350,000 to $750,000 price range has almost disappeared, forcing builders to hang onto properties longer and eating up profits by increasing their marketing and carrying costs.
Dividend, which has conducted 10 other auctions of properties in the past five years, said it expects to sell all 39 of the three- and four-bedroom, single-family dwellings 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 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 to 40 days in a market that typically is seeing three or four closed sales a month.”
Thus, even if buyers get the Dividend houses 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-based 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 Dividend is more adventurous than other builders because of its successful experiences with auctions and that Sunday’s event probably will launch at least a small boom.
He said he is already working with developers in Riverside and San Bernardino on potential auctions.
The Dividend auction is open only to pre-registered bidders who show proof that they can pay cash for their purchases or who file credit applications with the lender Dividend has retained to handle all financing.
“All the rest of the process is a typical real estate deal. The auction is just a method of setting the price,” Hagen said. Winning bidders will be required to post a 3% deposit.
The auction is scheduled to begin at 1 p.m. Sunday and homes in the development, located off Avenida Pico, are open to view from 10 a.m. to 6 p.m. today and Saturday and from 9:30 a.m. to 12:30 p.m. Sunday, Hagen said.
Dividend, which has held auctions at seven of its Bay Area developments, at a condominium project in Scottsdale, Ariz., and at two Rancho Mirage condo developments, is following up Sunday’s event with the auction April 22 of 39 homes at the Lake Mirage Racquet Club development in Palm Desert.
