Newspaper Story Our client, Kennedy Wilson Auction Group was featured in a news story about an upcoming auction in Los Angeles, California.
Understanding the Auction Action
How Upcoming Sales Events Work, And What Those Low Starting Prices Really Mean
by Ryan Vaillancourt
DOWNTOWN LOS ANGELES – Amid the recession, it can be a challenge for aspiring homebuyers to know how much condominiums or houses are really worth. But a handful of Downtown developers who are seeking to unload units by auction are making things easier — they’re essentially letting buyers decide the prices themselves.
On Sunday, April 18, 45 residences in developer Seck Group’s 80-unit 655 Hope will go up for bid. The following Sunday, 47 of the 65 condos at Downtown Properties’ El Dorado Lofts will go on the block. A third auction, at the Roosevelt Lofts, is in the works for late May.
Developer the Seck Group is putting 45 of the 80 units in its 655 Hope project up for bid on April 18. Photo by Gary Leonard.
The events follow 2009 auctions at the Market Lofts , Concerto and Downtown Properties’ Rowan Lofts. In all three instances, the auction helped the developer open buildings that had encountered difficulties during the housing market’s slowdown.
In most instances, say those familiar with the process, developers are having auctions for a few key reasons: First, lenders are enforcing requirements that buildings be 51% sold before closing mortgages for individual buyers. Auctions allow developers to generate excitement around the property in otherwise moribund times, and sell large chunks of inventory in one day.
Then there’s the timing, with developers looking to capitalize on low interest rates, a federal homebuyer’s tax credit that expires April 30, and a recently extended state tax credit that goes back into effect on May 1.
The Downtown auctions have come with plenty of buzz: Each event has been trotted out with extensive marketing campaigns, and the advertised starting bids are often low enough to raise the eyebrows of anyone with a basic familiarity with local market values.
“What happens is they’re able to fill a room and create excitement and get people to bid up thinking it’s a hot property,” said Michael Ferguson, president of the Loft Exchange, Inc., a Downtown residential brokerage. “But you also get a lot of people walking away, disappointed that there weren’t any closing bids remotely close to the starting bids that they advertise.”
At 655 Hope, starting bids for 600- to 700-square-foot units are $165,000. At the El Dorado, the opening bid for an 856-square-foot space will start at $245,000.
Bill Stevenson, a partner in Downtown Properties, which raised $21.8 million auctioning 63 of the 79 units offered at the Rowan Lofts in February 2009, is banking that the starting bids will lead to sales at a far higher price.
“I think all the minimum bids at the El Dorado are way below the market,” said Stevenson, whose own auction company, Intelligent Marketing Systems, will handle the April 25 event. “Now, I might be wrong and the seller is exposed to accepting those low numbers if that’s the way it goes…. But we’re taking that risk.”
To Publish or Not to Publish
Past auctions are convincing evidence that Stevenson’s risk is calculated. Sale prices at the Rowan were higher than the starting bids by an average of 10%. When auction firm Kennedy Wilson, which is handling the 655 Hope event and is in talks to run the Roosevelt auction, coordinated the Market Lofts sale, all 55 units on the block sold in less than two hours. Additionally, each went for well above its starting bid, with some doubling in price, according to data compiled by the Loft Exchange.
The whole point of advertising low starting bids, said Chris Longly, deputy executive director of the National Auctioneers Association, is to get buyers in the door. Although that tactic is in play at both the El Dorado and the 655 Hope events, the two properties will utilize sharply different sales methods.
Kennedy Wilson, which is handling the 655 Hope auction and was co-founded by Stevenson (he left the firm in 1996), employs a more traditional auction format, holding true to the basic vision of the fast-talking auctioneer working to bid up the price on units one at a time. Those who lose out on a condo can try again later.
At the El Dorado, Downtown Properties will use Intelligent Marketing Systems to put all the units up for bid at once. Buyers watch a screen in real time as bids increase. If a buyer’s desired price is topped, they can see what else is still available in their price range.
The most significant difference between the auctions is 655 Hope’s use of what is known in the auction world as an unpublished reserve. Each unit has a minimum, unpublished price that the developer needs to close a sale. That price is higher than the advertised starting bids.
At the El Dorado, the advertised starting bid represents the developer’s reserve price, Stevenson said. So while Downtown Properties anticipates having multiple bidders on every condo, if any unit gets only one bidder, that buyer can walk away with the property for the advertised opening price. That’s in part why the El Dorado starting bids are notably higher than those advertised at 655 Hope.
A wrinkle at the 655 Hope event is that the auctioneer can bid the price of a unit up to the developer’s unpublished reserve level. Additionally, any offer is subject to the final approval of the seller, the Seck Group, which can also counter or cancel any high bid within five days of the auction. (At the El Dorado, the high bid is guaranteed to secure the unit, Stevenson said.)
If the unpublished reserve method sounds secretive, Longly of the National Auctioneers Association says the practice is fundamental to most auctions. In fact, he argues that publishing the reserve price is counterintuitive to the logic of an auction, as it sends the message that the seller would part with the unit for close to that price, thereby dissuading bidders from offering much more.
“You’re going to have far more bidders at $165,000 because they’re going to go in thinking that I can get it for $165,000 but bidding is going to go from $165,000 to $220,000 real quick and then you’re going to find who’s the serious buyer,” Longly said. “At $245,000 you’re going to dwindle out your buyer pool.”
Kennedy Wilson President Rhett Winchell said that under the firm’s system, depending on how an auction is playing out, the developer can also lower the unpublished reserve price. Most sellers, he said, don’t typically focus intently on individual unit prices — they are more concerned with the aggregate value. So if some high-demand condos go well beyond their reserve levels, other units with lower demand may be released for less than their reserve prices, Winchell said.
“What we’ve learned is some of the units will perform, and they’ll be bid up, and some of them will have less competition,” he said. “That’s really determined by what the buyers perceive as what they’re worth.”
But from Kennedy Wilson’s perspective, the most important factor in their method is its success: The fact that their auctions tend to sell every unit offered, as occurred at the Market Lofts, indicates that buyers get what they bargain for, and that sellers may not be countering or canceling offers, even if they reserve that right.
“Sellers are highly motivated to sell, and that’s one of the reasons they’re doing an auction,” Winchell said. “They need to kick off this building and get through a majority of the units. They need to sell 51%, so that’s a motivation. That’s pretty powerful.”
From a buyer’s standpoint, the Loft Exchange’s Ferguson, who has helped clients navigate auctions at the Market Lofts and Concerto and is following the two upcoming events, said that it is important not to get fixated on the opening bids.
“What the potential bidder should really be concerned about is the ceiling price they’re willing to pay,” Ferguson said. “No matter what auction it is.”
Contact Ryan Vaillancourt at firstname.lastname@example.org.