Many builders consider auctioning off their standing inventory a sign of absolute distress and avoid them at all cost.
“I won't touch them for several reasons,” says Hope Dilbeck, director of sales and marketing for the Bakersfield, Calif., division of Standard Pacific Homes. “It makes the community look desperate no matter how you market it, and I've seen it go bad and significantly bring down the value and comps of a community.”
It's no more a sign of desperation, says Chicago auctioneer Rick Levin, than builders paying their buyers' mortgages for the first six months or offering someone a basement for a penny.
“Those are all just marketing tools and gimmicks,” he says. “It's a little refreshing to say to consumers, ‘The market is a little soft. We have a great community. Does anyone want to come help us out?' I don't think you can automatically discount this kind of marketing.”
With the slowing market, an increasing number of builders are using auctions to close out communities, reduce debt, and free up capital. In fact, real estate auctions of both new and existing properties are the fastest-growing section of the auction industry, says Erica R. Brown, public affairs manager of the National Auctioneers Association, in part because of the recent decline in home sales, but also because auctions are becoming increasingly more mainstream with online auctions, such as eBay.
“There's always been a stigma associated with auctions that it's a last resort or it's for foreclosures on the courthouse steps,” Brown says. “We're still fighting that—we're a $240 billion industry—but people are using it successfully for producing revenue and having a fast turnaround. ... If you're on a time schedule and you just need to get rid of it, it's an excellent avenue to take.”
Chicago-based builder/developer John Mullen used an auction in December to sell the last 17 of 100 condos in a building his company, Morgan Group, bought with two other partners in August 2005. He decided an auction was an appropriate exit strategy because his marketing costs had increased per unit, he had ongoing carrying costs, and as long as he had the project, he needed to staff the sales office. “If I totaled up all those savings that I could realize, I could pass that savings on to the buyers and they would get a good deal and we would get a good deal.”
The auction also gave him an opportunity to assess the strength of the market. More than 400 people attended open houses during the two weeks before the auction.
“We didn't have 400 people the previous 10 months,” he says. The auction drew 300 people, including 140 people who came with certified funds to bid on the 17 units, including seven that were sold at absolute auction (no minimum bid). “What that tells me is the market is still here,” he says. “There are an awful lot of people who want to buy what I've got.”
He sold the seven units he offered at absolute auction; they had originally been offered for between $210,000 and $310,000 and sold at the auction for $240,000 to $255,000. The sale allowed him to keep the remaining 10 units, lease some of them, and continue marketing on a reduced basis. “We sold some real estate, we reduced some debt,” he says. “And maybe some of those 300 people who attended the auction with the intention to buy will come back and buy a unit. They wanted to buy. They were ready to buy.”
Learn more about markets featured in this article: Chicago, IL.