All they have to do is ditch the reserve price, and auctions would work great – have some guts!  Hat tip to AL for sending this along from the wsj.com:

Last Friday, about 60 people gathered at a 10,300-square-foot French Chateau-style home in a gated community of this wealthy suburb of Los Angeles. Nibbling on fruit salad and croissants, the visitors meandered through the home’s large kitchen, checked out the view of the rolling hills or peeked into the movie theater with stadium seating while it played “Pretty in Pink.”

They had all gathered to see this seven-bedroom, seven-bath mansion, which was rented by singer Britney Spears between roughly 2008 and 2010, sell to the highest bidder. The home had previously been on the market for as much as $10.8 million; bidding would start at $4.5 million.

“I’m starting to get butterflies,” confessed Regina Leon, who owns the home with her husband Jose “Pancho” Leon, a builder and founder of a money-order company. After several of her girlfriends mentioned they were coming by, Ms. Leon had decided at the last minute to cancel her hair appointment to stay to watch the action unfold. Mr. Leon said he wasn’t worried, though he admitted he’d gotten only about four hours of sleep the night before.

Once considered a last resort for desperate sellers or for banks unloading foreclosed properties, home auctions are increasingly being used to sell penthouse apartments, waterfront mansions and grand country estates—many of them languishing in an uncertain market after significant price cuts. At Premiere Estates Auction Co., founded 10 years ago, the average price of a home the company auctions is up nearly 40% from a year or so ago, says auctioneer Anthony Fitzgerald. Gadsden, Ala.-based auction company JP King, in business since 1915, has seen inquiries for home auctions above $10 million so far this year double from a couple of years ago, said Craig King, the company’s president. In 2010, the company had 11 inquiries for homes above $10 million; so far this year it’s had 24.

As the housing slump drags on, the carrying costs of waiting out the market have become onerous, even for the wealthiest. A seller who put a home on the market in 2009 hoping that a turnaround was on the horizon may now be realizing that it could take several years or more for the market to rebound. Taxes on a $10 million or $20 million home can run into the hundreds of thousands of dollars a year, in addition to staffing, landscaping and other upkeep. The ultra high-end of the market is particularly vulnerable: As of September, houses priced at $10 million and above declined nearly 9.5% in value from last year, according to Zillow, the online housing tracker, compared to a 4.4% decline overall.

“Eventually, even the people who have unlimited means will throw in the towel at some point,” said George Graham, the CEO of Concierge Auctions.

Some brokers warn that when a well-known mansion or estate fails to sell at auction, it can become tarnished, making it harder to sell in the future. “If you have all that hype and then it doesn’t sell, then you’ve got egg on your face,” said Jeffrey Hyland, president of Beverly Hills-based real-estate firm Hilton & Hyland.

Bob Hurwitz, a longtime Southern California broker who recently tried unsuccessfully to auction off a $45 million sculptural-style home in La Jolla known as “the Razor,” said he’s concluded the process doesn’t benefit sellers, who assume all the risk by paying marketing fees up front. (Fees can range anywhere from a couple thousand dollars to upwards of $150,000 for ultra high-end homes.) He said auctions can also turn off potential buyers who don’t want to pay an additional 8% to 12% in premiums after the sale, which can amount to a million dollars or more for an expensive home. “It just doesn’t make sense,” he said. Laura Brady, of Concierge Auctions, said most buyers are aware that all real-estate transactions involve fees, and the premiums are included in auction-sale prices, “just like real estate agent’s fees” are in a traditional sale.

Mansions and estates are frequently auctioned for much less than their previous price tags, though those price tags may have been set unrealistically high to begin with. While both art-auction houses Christie’s and Sotheby’s are affiliated with real-estate companies, neither conducts real-estate auctions in the U.S. (Both have some affiliate agencies that have auction divisions which partner with companies like Concierge and Premiere Estates.)

Christie’s International Real Estate’s CEO Neil Palmer said in an e-mail that while such auctions are common in parts of Asia and in Australia, the company doesn’t view them as the best way for sellers to get the best price in the U.S., because when sales happen they are “more often than not at a steep discount.”

Mr. King from J.P. King, on the other hand, said that homes generally sell for steep discounts in today’s real-estate market even when they’re not sold at auction.

Last November, Maureen Coen, who works in fixed income for a financial company, heard about the upcoming auction of a home in her neighborhood in Tuxedo Park, N.Y., one morning and decided to show up. (Concierge Auctions, which handled the sale, says usually 48 hours advance notice is required to qualify.) She won the house for $2.3 million—75% less than its original list price of $9.8 million. “I got phone calls that weekend [from friends] telling me I got the deal of the century,” she says.

A historic New Canaan, Conn., estate with a 16,000-square-foot main house, a carriage house and three-bedroom guest cottage once priced at $22 million is coming up for auction next month with a starting bid and minimum reserve of $6.8 million—or nearly 70% off. Bronko Terkovich, a real-estate developer and architect in Jackson Hole, Wyo., plans to auction off his property there on Dec. 10. His 10,000-square-foot home was listed for $16 million in 2009; the reserve, or minimum sale price, is just under $6 million. “We wanted it to have a reasonable low-level price to attract the greatest spectrum of possible buyers,” he said.

On Wednesday, Sheldon Good & Co. auctioned the 56-acre Napa Valley estate of the late winemaker and philanthropist Robert Mondavi, with bidding starting off at $13.9 million in a sealed-bid sale; the property came on the market in May 2010 for $25 million. The company said several bids were submitted by the deadline and are still being reviewed.

As the average price of homes hitting the auction block ticks upward, a handful of companies have cropped up to handle such sales. Auction.com, which sells distressed real estate online, recently launched a luxury division. Jeff Biebuyck and Karen Baldwin, two Sotheby’s agents who had the Leons’ Calabasas listing, are launching an auction division of their traditional brokerage business, as has Jon Kohler, whose Georgia firm specializes in selling multimillion-dollar historic plantation properties in the South. John McMonigle, an Orange County, Calif., real-estate broker known for his trophy-home listings, has spun off an auction division called M Lux Exchange.

Auction companies argue that they can reach a wider pool of buyers than local brokers. They also say an auction announcement can create a sense of urgency that’s impossible to replicate in the buyer’s markets of today. “In this market, buyers think they can wait three months,” said Roger Ewing, the president of Ewing & Associates Sotheby’s International Realty.

The challenge for these companies is to aggressively market expensive-to-build, sometimes one-of-a-kind homes that will likely sell for steeply discounted prices without making it feel like a fire sale. Mr. McMonigle said his open-house events usually include Champagne and live music. “We want to perceived as that type of luxury experience,” he said. “We’re approaching it much like Sotheby’s would approach the sale of art.” Brochures are often sent directly to high net worth potential buyers, or their brokers. Ads are placed online, in national newspapers or glossy luxury magazines in the U.S. and, sometimes, as far away as Brazil or China.

On the day of the sale, generally only qualified bidders who have transferred money into an escrow account, or brought a cashier’s check, are invited, along with local brokers and, sometimes, neighbors. Hors d’oeuvres are sometimes served along with tea, coffee or Champagne. Concierge says at its Hawaii auctions, bidders are given floral leis. Mr. Fitzgerald of Premiere said that for morning sales, he likes to serve donuts and coffee to energize the crowd. The podium is generally placed to maximize the home’s best views.

Mr. Leon said he didn’t immediately consider an auction when he listed the Calabasas home for $10.8 million in 2007, after his wife concluded it was too big for their family of five. But after about two years and a price cut to $7.9 million, Mr. Leon decided to auction the home with Premiere. “It’s the entrepreneurial way of selling,” he said. Regina, his wife, eventually agreed, though she initially didn’t like having to explain to neighbors that their home was not in foreclosure.

With several dozen people gathered around a podium under a white tent, the auctioneer warmed up the crowd, getting them to sing the national anthem (it was Veterans Day) and conducting a mock auction that included bidding on Disneyland (a little girl in pigtails won). Then the bidding for the home began. The minimum bid of $4.5 million was quickly offered. Someone on the phone with an auction-company representative initially appeared to have the highest offer—$5.5 million—beating out about four others who showed up in person. After a minute or two of trying to rouse a counter bid from the crowd, the auctioneer banged his gavel on the podium and announced the home had sold, subject to seller confirmation.

It hadn’t—$5.5 million wasn’t high enough to meet the reserve, the minimum amount the Leons were willing to sell the home for. After most of the crowd had left, a neighbor who had been the runner-up in live bidding negotiated a $5.9 million purchase, including auction-company fees. The buyer, Dan Hosseni, owns Pizza Hut franchises across the state. He and his wife, Nancy, walked around the backyard with their 4-year-old daughter (the Disneyland winner) discussing plans to expand the dining room to accommodate their large extended family. “This is a house [my wife] and I are going to grow old in,” Mr. Hosseni said.

Though the sale has still yet to be finalized, Mr. Leon said he was happy. “It gives me an opportunity to move forward,” he said.

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Jim the Realtor
Jim is a long-time local realtor who comments daily here on his blog, bubbleinfo.com which began in September, 2005. Stick around!

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