If You Paid Full Price . . . : Coto de Caza Residents Angered by Plans to Auction Off Remaining Homes
Wayne and Diane Hauser are furious.
It was just seven months ago that they paid $408,000 for their five-bedroom home in this gated community in South Orange County. On Sunday, the developer plans to auction similar models at a starting bid of about $225,000.
The Hausers don’t believe that’s fair. Neither do Nina and Mark Peterson, the first couple to move into the development--called Summerfield at Coto--when it opened early this year.
They say they will lose a huge chunk of equity if Summerfield developers--Coast Construction Co. of Brea and Kajima Development Corp. of Monterey Park--sell the remaining 26 homes in the 44-home development at what could be steeply reduced prices.
The complaint comes at a time that the Southern California housing market is in a serious downdraft. More and more new home builders are turning to auctions as a quick way to move blocks of hard-to-sell homes quickly and efficiently.
But such sales tactics carry a price tag. Typically, the developers lose a little--selling at a slight discount to market price--but recent home buyers take big paper losses. Suddenly the price they paid--and continue to pay each month with their mortgage payment--is above what even the builder says it is worth.
While the Hausers and Petersons have good reason to complain, building industry specialists say they are victims of circumstance, not of design. The experts say the developers must bail themselves out to survive in a down market.
A spokeswoman for Kajima, the U.S. arm of one of Japan’s largest home builders, said that the companies, caught by “a rapidly changing market” that resulted in a sales slowdown, “felt that an auction would allow us to sell . . . efficiently at current market values.” The auction, she said, also should “produce savings for us” by moving all the homes at once and eliminating further carrying and marketing costs.
Nat S. Harty, president of Coast, a Brea developer that specializes in upscale homes in Orange and Los Angeles counties, declined comment Thursday.
Selling homes at a steep discount from what the initial buyers paid is a developer’s nightmare, said Penelope Eaton May, president of the Eaton Group, a Laguna Niguel real estate marketing firm.
“But when it comes down to the wire, and they have no more room to play, when their lenders won’t or can’t change the construction loan to accommodate the builder, then often the only thing that can be done quickly is an auction,” she said.
And that is happening with greater frequency in Southern California as developers find traditional sales method simply don’t work in a down market.
“The industry is in a typical oversupply situation and auctions are one ramification of that,” said Steve Johnson, vice president of the Meyers Group, a Chino real estate company. “Another is that in the absence of price controls there is no guarantee that property values will increase.”
The alternative often is to let the bank repossess the homes. “Then the existing residents are stuck in a neighborhood with empty homes with boarded-up windows and dead lawns, and that can have a more deflating impact on their property values than an auction,” Johnson said.
The Hausers and other Summerfield residents say they wouldn’t mind if Coast and Kajima offered new buyer incentives--like trips to Europe or luxury cars or free landscaping--to generate sales.
“Anything, as long as they don’t lower the prices,” said Nina Peterson.
But those kinds of incentives don’t work well for homes in the Summerfield price range, where the problem is finding buyers with enough cash to make a sizable down payment so they can qualify for a $300,000 or larger mortgage loan. So lowering prices is often a developer’s only out, May said.
“And an auction is just a lot more public way of doing what’s been going on for months. Builders are talking less money for their products. It’s a slow market,” she said.
But an auction doesn’t automatically mean lower prices.
“We are not hired to get the minimum,” said William Lange, owner of Lange Financial Corp. in Newport Beach.
Lange, who has conducted real estate auctions throughout the country, said he recently got average prices more than double the minimum bids and 4% higher than the last posted retail prices on a group of homes in Santa Maria.
Advertisements for the Summerfield auction say homes will be offered at minimum bids as low as $215,000--or about 44% of the last posted price for that particular model.
Harty met with the 10 Summerfield families last week to try to explain his company’s position, but the meeting failed to satisfy Nina Peterson and Diane Hauser.
Peterson said that when she and her husband selected their model, “way back in May, 1989, we’d never heard of Coast,” Peterson said. “But the sales people assured us that with Kajima as a partner, they’d never have financial problems. Some developers already were starting to lower prices back then and we asked about that, but we were repeatedly assured that Coast would never cut prices. We were misled.”
Peterson and Hauser each said Harty acknowledged knowing in mid-1989 that the residential market was slowing and said they demanded to know why he did not lower prices for them at that time.
“Harty didn’t answer, but the answer is that back then there were still people like us, who were stupid enough to pay those prices,” Peterson said.
