More than 170 people crowded the ballroom of a Long Beach hotel for what amounted to an upscale fire sale.
The event was an auction. The products were 38 posh waterfront condominiums. And bidders like Mike Murphy came looking for bargains.
The Internet marketing worker snapped up a two-bedroom unit for $376,000, less than half the original price. In all, he and other eager buyers ponied up $14.9 million in less than 90 minutes.
Last Monday’s event represented the latest evolution in distressed-property auctions: These last-resort sales are going high-end. In contrast to auctions of foreclosed homes, which are as ubiquitous as trashed houses in the suburban hinterlands, these sales involve brand-new, often luxurious condominium units in prime locations.
Across Southern California, projects conceived during the housing boom, but completed after the bust, are sitting largely vacant. Developers are desperate to unload these units, but they face some particular challenges. Banks often won’t provide mortgages to buyers in buildings that are less than 50% occupied, reducing the pool of eligible purchasers. Converting the projects to rentals means even steeper losses because the cash flow often won’t cover a developer’s construction costs.
Condo developers are now hosting their own auctions to attract a critical mass of buyers fast. It’s a practice that Irvine real estate consultant John Burns projects will become more widespread this year.
“I don’t think you have much choice,” he said. “You either turn it into an apartment rental complex or find some other way to turn it into 50% occupied very quickly. An auction seems like a logical choice.”
Real estate values continue to fall across much of Southern California, keeping many buyers on the fence for fear of paying too much. An auction gives them real-time assurance that the price is set by an open, competitive process, not the seller’s whim, said David Parsky, director of West Coast investments for Citi Property Investors. That’s a unit of Citigroup Inc. that is the controlling owner of West Ocean Two, the Long Beach building that auctioned its units last week.
“If people don’t have to buy, they’re not going to unless there’s a reason,” Parsky said. “If the market had more demand than supply, we wouldn’t be doing this.”
Other recent auctions include new condominium projects in downtown Los Angeles and South Pasadena. More are coming in places including Pacific Palisades and Playa del Rey.
At last week’s sell-off in Long Beach, the lowest price paid was $228,000 for a one-bedroom unit on the second floor of the 22-story building. The developers had originally listed it for $512,800. The highest price paid, $718,000, was for a three-bedroom unit on the 19th floor originally priced at $1,415,600.
Whether these deep discounts were truly bargains depends on how much further the market has to fall. The median resale price for condominium units in Southern California was $230,000 in March, down 30% from the same month the previous year, according to the real estate research firm MDA DataQuick.
Some auction buyers did pay less than others who bought last year. In November, a two-bedroom, 1,040-square-foot unit in West Ocean Two sold for $545,000, public records show. Last week, similar-size units were auctioned for $430,000 and $419,000.
The auction was the second for the building. The first was held in August, after only 20 of the building’s 114 units had been sold. That gathering resulted in 33 sales, prompting Parsky to hold last week’s event.
Auction participant Murphy showed up at the Long Beach Hilton more than an hour early to get a crack at the bidding. A resident of Long Beach, he had been watching the market for an opportunity to move up from his 700-square-foot condo.
Murphy, 41, said he had been biding his time in his new home search, but the chance to get a bargain at auction sped up his plans.
“It forced me to get my ducks in a row and get a firm idea of where I want to go,” he said.
Murphy said he wasn’t overly concerned that the value of his new purchase might decline. No one can call the bottom with certainty, he figures, and he believes that he got a deal. Comparable units in the neighborhood are selling for almost $25,000 more than what he paid, Murphy said. Besides, the extra storage in his new garage will be perfect for his hockey equipment.
Converting foot-dragging looky-loos into buyers is the magic of the auction, developer Alon Zakoot said. He plans to unload the last seven condos in his 16-unit Pacific Palisades building at a public sale May 31.
Buyers these days can be downright surly, Zakoot said, because they consider every property to be overpriced.
An auction “is kind of a trick. They don’t come in so negative,” he said. “They allow themselves the mentality to love the unit.
“You tell them there is an auction, they talk about how pretty the building is, how beautiful. Before, when you set one price . . . all you get is negativity.”
Zakoot now gets about 150 weekend visitors to open houses, about double the traffic he got when he was trying, without success, to sell the units conventionally.
More important, “before, when somebody comes, they stay 15 minutes. Now they stay two hours,” he said.
Zakoot resorted to an auction because he wanted to cut his losses quickly so he could move on to other projects, he said.
He began designing and planning the project in 2003, when the housing market was still hot.
In 2006, someone offered him $12 million for the still-bare land and project plans. The sum would have yielded an instant profit. Zakoot, a jocular, self-deprecating Israeli immigrant, said he turned it down because “I am a smart guy.”
Minimum bids for his upcoming auction start at $449,000 for a two-bedroom unit and $1.149 million for a four-bedroom unit. What he’ll get is anybody’s guess, Zakoot said.
But he’s certain of one thing: Whatever the outcome of the auction, he’s done as a condominium developer.
“Never a condominium,” he said. “Never again.”
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Deep discounts at Long Beach auction
The soft real estate market has developers of upscale condominium buildings auctioning brand-new units instead of trying to sell them conventionally. Thirty-eight units were sold at auction last week in West Ocean Two, a Long Beach high-rise completed in 2008.
Original price: $512,800
Opening bid: $195,000
Winning bid: $228,000
Features: One bedroom,
one bath in 893 square feet
Original price: $1,415,600
Opening bid: $625,000
Winning bid: $718,000
Features: Three bedrooms, two baths in 1,651 square feet