Illustrating the Benefits of an Auction for Unsold Condominiums
Illustrating the Benefits of an Auction for Foreclosed Single-Family Homes
Illustrating the Benefits of an Auction for a High-End Estate Home

Illustrating the Benefits of an Auction for Unsold Condominiums

SITUATION

A 50-story condo building in downtown Chicago had 40 unsold units remaining of 250. Due to a downturn in the economy, sales had slowed to a rate of 10 units per year and the increased elapsed marketing time was eating away at profits. With the construction loan paid off, other investment opportunities presented themselves to the developer, but the carrying costs of the unsold units prevented the developer from investing elsewhere.

SOLUTION

The developer was introduced to the financial benefits of taking the remaining 40 units to auction. This process began by assessing the holding costs for the following four years. With these figures in hand, it was determined that the holding costs (including lost opportunity costs) presented a large enough affect on net proceeds and the developer’s own equity upon closing, that a detailed analysis of an auction was warranted.

The financial requirements and marketing plan for an auction were established. Addressing these concerns incorporated the answers to three main questions:

• What is the Net Present Value (NPV) of selling 10 units per year for four years?
• How much would the 40 units have to command at auction to equal this NPV?
• How can we create an action-oriented targeted marketing program that will bring in buyers?

A Bidder’s Choice auction plan was selected in which the highest bidder wins the right to choose a unit to purchase from a pool of similar offerings (i.e., the one-bedroom units, the two-bedroom units, etc.). Bidder’s Choice increases buyer competition because the bidder for unit X will be bidding against the bidder for unit Y. It also allows the highest bidder to purchase more than one unit at that same bid level. The unit or units selected are then removed from the pool and the second round of bidding commences until all the properties are sold and bidding on the next pool then ensues.

REALIZED BENEFITS

The developer quickly realized that in understanding the time value of money for their development, that an auction which sells the units at a discount could in fact increase their return on investment. Supported by a detailed analysis drawn up by the auction team, the developer realized that if the auction sold the units at only 66% of the listed price, they would meet the NPV of individual sales over four years. In doing so, the developer was able to afford to invest in other development projects and protected their equity from further erosion. The developer decided to auction all 40 units in a minimum bid auction, requiring minimum bids at 50% of previously listed prices. Every unit sold at 75%-80% of previously listed prices and closed within 45 days.

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Illustrating the Benefits of an Auction for Foreclosed Single-Family Homes

SITUATION

Foreclosed homes taken back by the former First City Bank in Texas were taken on by Collecting Bank N.A. of Houston., which ordered disposal of all 475 of these residences. These holdings included houses, duplexes and condominiums throughout the State of Texas.

SOLUTION

The auction method of marketing and sale was selected to provide the quickest avenue of disposal for the highest possible return.

One-fourth of the offerings were designated “Absolute,” meaning that the highest bid won the property, regardless of price. Absolute auctions typically result in the highest sales prices because they draw the greatest level of interest from buyers because of the distinct possibility of making a great deal. The decision to offer so many properties Absolute was a sound strategy, as witnessed by more than 5,000 attendees who came to the auctions held in six cities across Texas during the 10-day auction sale.

REALIZED BENEFITS

When the gavel fell on the last property, 475 properties had been sold, eliminating toxic assets from the bank’s balance sheet. Individual blocks, neighborhoods, even entire communities began a return to normalcy as formerly vacant homes became occupied again. End-users and investors alike were able to purchase properties at a price and in a fashion highly unlikely in a traditional real estate transaction model.

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Illustrating the Benefits of an Auction for a High-End Estate Home

SITUATION

Developer of an opulent, single-family home in the southwest corner of the upscale community of Wilmette, Illinois, was struggling to sell the property in the face of a general economic downturn combined with recent, expensive re-building that made the property highly unique.

SOLUTION

The reserve auction method of marketing and sale was selected to provide the quickest avenue of disposal for the highest possible return. This strategy was decided upon following extensive consultation with the auctioneer, who explained the potential impediments to the sale of the uniquely designed property combined with a continuing and daunting slide in the overall real estate market.

REALIZED BENEFITS

A sale price of $1.65 million was achieved. Following the sale, as the market continued to deteriorate, the seller wrote to the auctioneer with his appreciation, stating “I am eternally grateful to you for talking me into accepting the buyer’s bid. Otherwise, the out-flow would have continued. Thank you once again.”