Real estate auctions are often associated with foreclosures or undesirable properties that couldn’t be sold through normal channels, according to the NYT the rich are now starting to get into the act.
IT took three years for John F. Welch Jr., the former chairman of General Electric, to sell the house he bought in 1990 in Fairfield, Conn. Initially on the market for $13 million, the property twisted in the wind like the corporate kingpin's scandal-laced divorce proceedings, which were settled in 2003. The 10,700-square-foot Georgian-style estate finally sold this April for about half its original asking price.
Apparently determined not to get burned again — at least not slow-roasted, rotisserie style — Mr. Welch has decided to auction a second property that he also got as part of the divorce settlement: a three-year-old, 16-room waterfront mansion in Southport, Conn., which is expected to bring in at least as much as the Fairfield house. Sealed bids and certified or cashier's checks for 5 percent of the price offered are due on this 9,100-square-foot trophy house by 4 p.m. on Tuesday, according to Sheldon Good & Company Auctions, the national auction firm hired by Mr. Welch, who would not agree to an interview for this article.
His surprise maneuver could help raise the visibility of residential real estate auctions. But whether the business-savvy Mr. Welch is in the forefront of the latest trend in real estate depends upon where you live, what the terms of engagement are, whom you ask — and how many slings and arrows sellers have taken (or expect to take) in a turning market.When someone like Jack Welch, who can sink the economy of Latin America by simply having a heart murmur, decides to put use an auctioneer instead of a broker, you realize how f**ked up this market is.
Like Mr. Welch, whose other Connecticut house lingered so long unsold, many sellers who are now dipping their toes into auctions have first thrashed about in the riptide of what is increasingly a buyers' market. They have suffered the emotional distress of an extended listing, and if they have already bought their next house, they are battered by double mortgages.
To them, an auction's speed (often 45 to 60 days from first showing to closing) and finality (no further negotiations may occur after the gavel comes down or a sealed bid is accepted) outweigh the negatives: marketing costs ranging from several thousand dollars for a four-bedroom tract house to $100,000 for a Welch-sized estate, usually paid by the seller whether or not the auction succeeds; negotiable commissions as high as 10 percent; and a selling price that typically lags 10 percent below the last listing.
Still, the concept is intriguing enough that at least one major Manhattan company, Prudential Douglas Elliman, is considering opening an auction division. "It's an art, it's a skill, it's really a lot more complicated than anybody thinks," said Dottie Herman, the company's chief executive and one of the city's few real estate brokers who appear to favor the concept. "And if it's done right, it's great."Dottie doesn’t strike me as somone who would take this development lightly, in fact I would not be surprised if she’s got a group of tech monkeys from India in the back room putting together some type of online solution.
Still, David R. Kaplan, a financial service adviser from Huntington, N.Y., on Long Island, is fully conversant with the muted joys of auctioning. He and his wife, Ilene, listed their four-bedroom Cape Cod a year ago with a big-name brokerage for $465,000. Expecting a third child, the couple bought a center-hall colonial about a mile away for $525,000.
They spent six months shackled to one brokerage by an exclusive listing agreement. "For some reason, this particular house had some type of stigma, and no one seemed to know what to do," Mr. Kaplan said. "The market had begun to turn downward and inventory upward, and there were just other choices in the same price point, homes that suited people better. We lowered the price three times, to $339,000."
Through an acquaintance, Mr. Kaplan heard about Robert H. Baker, the owner of 1,2,3 Realty Auctions in Bellport, N.Y. Mr. Baker was having some success auctioning houses from Brooklyn to Eastern Long Island in the $300,000-to-$500,000 range and the $800,000-and-up range. (The $500,000-to-$800,000 category accounted for most of his company's 30 percent failure rate, which he attributed to a glut in inventory.)
The first auction on the Kaplan house was scheduled just after the New Year's holiday.
"It was a bad time — nobody showed up," Mr. Kaplan said. "It was a severe disappointment, obviously. Emotionally, we'd been a wreck for a year. Owning two houses was not supposed to happen. It dragged us down terribly financially."
At the second auction a few weeks later, four or five bidders materialized with the $10,000 bank checks required to participate.
The Kaplans walked away with just $375,000 — "nowhere near" what they needed to pry themselves out of their financial tar pit, Mr. Kaplan said.
On the other hand, the house was sold. "I think if the economy had been a little different — if we had gone to auction immediately instead of taking the traditional Realtor route, I'm positive we would have gotten our price," Mr. Kaplan said.These people got a great deal. Despite the price reductions they were able to get their money out without paying a broker, which is a luxury especially in this market.
Indeed, as inventory continues to bloat (there are more Manhattan listings than at any time since Miller Samuel, the appraisal and consulting firm, began tracking them in 1999), wallflowers are left wondering whether it would have been better to have gone directly to auction.
Auctioneers say yes and add that they are seeing more fresh listings as people assess growing competition in the traditional market.
"We'd prefer there to be an environment where there hasn't been an asking price on the property," said Michael A. Fine, the executive vice president of Sheldon Good & Company Auctions, which is handling the bids on the Welch mansion. Otherwise, he explained, the buyer might not "pay more than the last asking price on the property."
Mr. Fine and other high-end national auctioneers like the J. P. King Auction Company of Gadsden, Ala., say that trophy homes are particularly well suited to auctions, fresh or not.
They argue that comparables can be more difficult to obtain for highly individual homes and that even in good markets, their time on the market can range from months to years. They contend that their meticulous attention paid to glossy and detailed marketing materials can attract a wider range of asset-soaked buyers than traditional brokerage firms.
The last argument convinced one pair of Sheldon Good clients, Lynn Krominga and Amnon Shiboleth of Manhattan, that their traditional brokerage firm, which had listed their Hamptons weekend home unsuccessfully at $18.5 million last fall, wasn't attracting the right sort of buyer.
Built in 1904, the Arts and Crafts-style house, designed by Wilson Eyre, on seven waterfront acres in Quiogue, just isn't the sort of place to quicken the pulse of the usual big-ticket Hamptons buyer, Ms. Krominga said.
"Most of the buyers here are looking for something big and new," she said. Ms. Krominga and her husband, both lawyers, decided to sell last fall because the hectic schedule of their 13-year-old daughter, Karen, kept them from using the house. It has a new 57-foot swimming pool, spa, tennis court and backup generator for the entire property. (The home can be purchased furnished, with the option of including a 1987 Bentley and a pair of Jet Skis.)
Ms. Krominga said that the marketing fees she will be expected to pay were less than $120,000. But she expressed confidence that the auctioneers "can deal with the uniqueness of the house and structure the sale in a way that we can reach those people quickly" who would be interested in this sort of property.
The bid package, which costs prospective buyers $100 apiece, entitles them to attend the seven public viewings from June 3 to July 8, during which they can bring their inspectors, architects, decorators and advice-spewing relatives. Sealed bids and a deposit of $250,000 (refundable to losers) are due on July 13. If Ms. Krominga wanted to cut down on her overhead she could put a couple of ads on craigslist and send a blast email annoucing the auction and viewing and use eBay instead of using an auctioneer.
Manhattan and certainly its brokers aren't embracing auctions to the same extent as, say, Long Island or virtually the entire Midwest, where auctions have a long history in every category.
As for the auction of Mr. Welch's house in Southport, the owner's notoriety is everything, in one broker's view. "To me, that's a ticket for immediate excitement," said Diane M. Ramirez, the president of Halstead Property in Manhattan. "But for anything short of that, you're not going to get the kind of press this particular auction might get. I don't think it's going to make auctions a viable option in general."
Explanations diverge for Manhattan's longstanding resistance to auctions. One is that 75 percent of the city's housing stock under individual ownership is co-ops, and this negates the major asset of an auction: its certainty. When auctioning a co-op, auctioneers have some idea about the financial pedigree necessary for the winning bidder to win board approval, but approval is in no way guaranteed. The bidding populace is still weighted more toward investors, but co-op boards favor owners who will actually occupy their apartments and usually limit subleases. Approval is always contingent on the board’s approval of the buyer. And even brokers can be blindsided by a buyer’s financial pedigree so as far as I am concerned the risks are the same whether you go with a broker or the auctioning venue.
That still leaves condos and town houses. But their owners may still not be willing to price the properties low enough to incite bidding.
"When people call me and say, 'We want to sell it at auction because we're not getting our price,' I say, 'Your price is too high, no doubt,' " said William Mannion, the president of the JP&R Advertising Agency, which specializes in auctioning off distressed properties in the New York area.
And then there's a sort of rivalry between brokers and auctioneers, a "kind of an us-versus-them mentality that we're trying to shake," said Jan Hope, the managing director for business specialties at the National Association of Realtors. The association has operated an auction division since 1990, a de facto endorsement of the real estate auction market, put at $14.2 billion a year in a 2005 survey by the National Auctioneers' Association.
Some New York area brokers say they conduct "sealed bid" auctions similar to those auctioneers hold. And they tend to dispute the idea that auctioneers use more structured bid documents that leave less to quibble about after a bid is accepted. Auctioneers, meanwhile, cite their broad marketing reach and their ability to stage a live "open outcry" auction when sealed bids are close.The real estate residential transaction and the auction involve the same process. The difference lies in the execution, but the product of real estate is transferable to either process. I think that is why brokers are resistant to this trend since they could be replaced.
Brokers here also contend that a historic predisposition toward auctions for distressed properties has produced bottom-feeding bidders, and traditional sellers are still more likely to get the best price when they aim for the ceiling instead of the floor.
"For a really good auction dynamic, you start low to get people interested, and if the marketing is done well, you work up to the eventual sales price," said Stuart N. Siegel, the president and chief executive of Sotheby's International Realty. It is by design that this affiliate of the fine arts auction house has only auctioned six houses in its 30-year history, most of them historically or architecturally significant.
"Unfortunately, in this country, auction does have a taste or a scent of distress," Mr. Siegel said, echoing a commonly held notion. There is going to be a lot of distress in the near future anyway so they might as well examine the option of using an auction. In terms of the barriers of entry in the Manhattan market for auctions, if the residential market takes enough of a beating and sellers are desperate to cash out, they will be more than happy to fulfill the requirements of an auction including lowering their prices.
A decade ago, in a bottomed-out market, Dr. Gayle Grenadier, a former oral surgeon who is now the president of Gayle Grenadier Design, a Manhattan jewelry company, and her husband, Kenneth Richman, the chief executive of Threadtex in Manhattan, decided to auction their town house on East 62nd Street. It had been on the market for two months and had an offer of $2.9 million, but "the buyers seemed sketchy," Dr. Grenadier recalled. She decided to hire Sheldon Good to auction the property after attending one of the firm's auctions in the Hamptons.
"Everybody tried to talk me out of it," Dr. Grenadier said. She went ahead and paid a $40,000 marketing fee, which brought "a world of exposure," she said. There were 10 active buyers competing. in the auction, and the property sold for $3.5 million. She paid the auctioneer a 6 percent commission.
Now, another seller is betting on making a splash.
Thomas Leli, a hospital engineer, has had his four-bedroom, 2,200-square-foot Cape Cod in East Quogue, on eastern Long Island, listed for a year, cutting the price from $699,000 to $649,000.
"They showed it millions of times," he said. "I never even had an insulting offer."
Then a colleague told Mr. Leli how 1,2,3 Realty auctioned her house in Southampton for $450,000, which was $75,000 higher than her minimum. Mr. Leli and his wife, Deborah, are closing on a new home in Florida, and they will auction off their house in East Quogue on Wednesday.
"Right now I think people think it's a novelty because it's so new around here," he said, referring to auctions rippling through what he views as an increasingly listless market. "I think people who get in early will do well."’Novelty? Haven’t these people ever heard of eBay? This reminds me of those short bus riders who are raving about a new service that will send live content to their iPods. It's called a radio folks.
If the Bernanake see the economy is going to pull a Titanic with inflation acting as the iceberg he will raise interest rates and people with interest only and balloon mortgages will have no choice but to liquidate if they can’t cover their payments. As I have stated repeatedly in the past, sellers will do everything in their power to lower their overhead and if that means replacing the broker with a more cost efficient solution like auctions then so be it.
Brokers need to remember that customers have more options at their fingertips and they are willing to explore them.
Time is a huge factor in the real estate transaction and if you can present a solution that can streamline the process then and allow them to get their cash ASAP then sellers will firebomb an army of brokers to use that service. Even if sellers decide to utilize a broker they can use these options as leverage against the broker to lower the commission.
Brokers that ignore auctions are doing it at their own peril, NAR has already proven it to be a very lucrative. If eBay doe not do the full court press and expand their real estate services, then it is possible that that Zillow, Propertyshark, Sellsius or some other upstart is going create an online auction site that is devoted exclusively to real estate resulting in darke ages for real estate brokers.