Going, Going . . . Sold! : Home Builders Again Are Turning to Auctions as a Marketing Tool and Not as a Last Resort

Newspapers recently have been full of ads for new home auctions, and it doesn’t take the acumen of a Harvard MBA or a holmesian deductive talent to realize that most are attempts to sell properties that weren’t selling conventionally. But that is changing. Some ads now trumpet grand-opening auctions.

And real estate auction companies say they are receiving a flood of inquiries from builders interested in auctions as an initial marketing tool rather than as a desperation move when all else has failed.

One new player on the scene, 4-month-old Auction Marketing Services in Irvine, has landed a potential plum as its first job: the May 19 auction of 52 luxury, single-family homes for Val-Co Construction Co. in Torrance.

Co-founder and President Susan Stevens, a seven-year veteran of auction giant Lange Financial Corp. in Newport Beach, claims that the Val-Co auction will be the largest residential auction ever held, as measured by a pre-auction combined asking price of $38.5 million for the properties, which have retail price tags of $499,990 to $719,000.

The previous record was a Lange Financial auction of 15 luxury homes and 59 vacant lots at J.M. Peters Co.’s Palmilla development in Laguna Niguel late last year. The combined asking price for the Newport Beach builder’s properties totaled $29 million; Lange whipped up enough interest to pull in $23 million from buyers, or 79.3% of the original retail value.

And setting the price tag aside, Auction Marketing’s upcoming sale underscores a dramatic change in residential auctions.

Most auction companies operating today got started in the last real estate depression in the early 1980s as builders desperate for sales asked commercial auctioneers to move homes languishing in a market plagued by an economic recession and 20% mortgage rates.

When the market recovered in the mid-1980s, many auction companies returned to auctioning commercial buildings, government property and foreclosed banks. Residential builders returned to selling homes the old-fashioned way--one at a time--which took months, even years, to sell out an entire tract.

As the residential market slipped into recession once again last summer, auction companies again offered their services, lining up distress sales and builder clearances.

But established auctioneers, such as Lange and Kennedy-Wilson Inc. in Santa Monica, as well as newcomers, including Auction Marketing Services and 2-year-old Real Estate Disposition Corp. in Santa Ana, also launched a concerted effort to persuade builders that auctions would be valuable even in a good market.

Nearly 60% of all new homes sold in South Orange County in the last half of 1990 were sold in auctions. And as builders saw the auctioneers’ successes, auction companies started chalking up converts.

“We have done several grand-opening auctions in recent months,” said Brooke Lauter, marketing director for Kennedy-Wilson, “and about 35% of the inquiries we get these days are from developers who want to begin from the first with a grand-opening auction.”

The nation’s banks and thrifts, in a tough new regulatory climate, have helped auction companies by insisting that developers either ante up sizable cash investments in their own projects or develop successful strategies for selling units before building them, said Jim Lewis, senior vice president of Real Estate Disposition Service.

“They are looking at auctions as a good technique for selling a lot of units in one batch to meet that requirement” for pre-construction sales, said Lewis, adding that his company is negotiating with three area developers for grand-opening auctions and is pitching deals to eight others.

“Developers have gotten educated in the current market, and they finally are seeing auctions as a legitimate marketing technique,” said Auction Marketing President Stevens.

“It is no longer a question of whether to use an auction company,” said Lange Financial founder William Lange. “All that developers are deciding now is which auction company to use.”

What developers now realize, auctioneers say, is that an auction doesn’t mean giving away the farm. A major ingredient of any well-orchestrated auction is a manufactured excitement known in the trade as auction frenzy, which is intended to cause people to get caught up in the bidding and lose track of what they spend.

Typically, auctions advertise starting bids 35% to 45% below the homes’ last listed retail price, but they bring in considerably more money. Most auctioneers shoot for 85% to 95% of the builder’s original asking price.

“An auction creates a sense of urgency where there wasn’t any urgency before,” said Art Valdez, president of Val-Co Construction. “That’s what makes them work.”

In the Val-Co auction, minimum bids will range from $395,000 to $455,000. But Valdez said he would be “very disappointed”--and probably lose money--if bids came in that low.

Still, auction-bid minimums can be set 40% or more below retail prices because developers save tens of thousands of dollars per home in carrying costs by eliminating the combined cost of interest on the construction loan, prolonged marketing and advertising campaigns and salaries for sales, and security and maintenance staffs until all the units are sold.

“My thinking is that rather than living with this project for a year or so while I try to sell through conventional methods, I’m better off with an auction that moves all 52 homes in one day,” Valdez said.

Valdez said he hired Auction Marketing Services to handle his sale because it was more “flexible” than the established giants.

Stevens defined that flexibility as her company’s determination to make auctions more cost-effective for developers by undercutting the competition on commissions and advertising costs. Most auction companies charge commissions of 4% to 6%, while developers generally pay 1% to 2% to their sales staffs in conventional marketing programs, she said.

In the upcoming Torrance auction, Valdez opened a sales office and models in January, but he said he already had decided by then to use an auction for the grand opening.

Several homes in Valdez’s Tuscany Meadows development were sold at full retail price before his decision to use an auction was cemented. But Valdez said he called in the buyers and informed them that the neighboring properties will be offered at auction.

“I gave them the option of keeping the deals they’d already signed or canceling them and bidding in the auction. I told them that I thought they’d get a better deal in the auction, and they agreed.”