When all else fails, a high-stakes sealed-bid auction can usually be counted on to jump-start interest in a listing.
Brokers are increasingly turning to sealed-bid auctions, sometimes called a “highest and best” bidding process, as the economy continues its downward slide and other, more standard selling strategies fail to achieve results.
Although time-consuming, sealed bids can help build buzz and distinguish a property in a market that has a growing supply of inventory competing for the attention of a small pool of qualified buyers, brokers say.
Manhattan’s famously finicky co-op boards mean the strategy won’t work for every listing, but for some it can provide a badly needed alternative when an apartment is lingering on the market.
“We’re in an unusual time, and unusual circumstances call for unusual concepts and unusual ways of marketing. That’s what this is,” said Richard Orenstein, an executive vice president at Halstead Property who conducted a sealed-bid auction last month for a three-bedroom penthouse with a private elevator at 304 Spring Street.
Such auctions occurred on occasion during the boom years, but they are becoming more popular now as a way to help sellers to unload apartments quickly, said Orenstein, who noted that the auction last month was the first time in his 21 years as a broker that he sold an apartment through sealed bids.
“My sellers want me to close the deal,” Orenstein said. “In today’s market, where there are very few transactions, this is what we came up with as a solution to get it done.”
In contrast to today’s sealed-bid auctions, those of the boom years typically were used to help organize a pre-existing bidding war and often didn’t have a minimum bid or a contract, said Stephen Kliegerman, executive director of development marketing at Halstead.
“It’s the same process, but for opposite reasons,” said Wendy Maitland, a senior vice president at Brown Harris Stevens who also accepted sealed bids last month for a 2,200-square-foot two-bedroom at the Majestic at 115 Central Park West.
Business of bidding
Sealed-bid auctions require potential buyers to submit their bids in writing by a certain date, at which point the seller chooses the most desirable offer.
Orenstein’s Spring Street condo was originally listed in October 2007 for $9.25 million. A contract was signed for $7.8 million in August 2008, but when the market faltered in October, the buyer, a professional basketball player, backed out of the deal and gave up his $780,000 deposit. Although the home was recently appraised at $6.5 million, Orenstein said, the minimum bid for the auction was $4.995 million — nearly 25 percent below the appraised value.
Orenstein required bidders to pay a 10 percent deposit, which was refundable for everyone but the eventual buyer. The package also required a contract for the sale of the apartment signed in advance by the bidders, explained Kliegerman, whose team is marketing the entire building.
The seller, meanwhile, signed a contract guaranteeing that he would take the highest offer that met all the bidding requirements. The bidding for 304 Spring was scheduled to start at 5 p.m. on March 31 at the offices of the seller’s attorney. Offers below the minimum bid would not be considered, said Kliegerman.
The idea for the auction, he said, is to build buzz both through the low price and the speed of the process.
“It certainly brings more attention to the property and creates a sense of urgency for buyers,” he said, adding that the condo was shown only a few times before the auction.
The seller at 304 Spring Street is moving to Italy, said Orenstein, noting that sealed-bid auctions are effective for sellers who want to move as quickly as possible. “The bottom line is, these are people who really want to sell,” he said.
The process also has proved successful at the low end of the market. Barak Dunayer, president of Barak Realty, said a sealed-bid auction can help distinguish a cookie-cutter listing. “You need to do something to stand out,” he said.
Barak Realty recently auctioned off a one-bedroom at 100 Bennett Avenue in Washington Heights. Normally the property would go on the market for between $275,000 and $295,000, but the minimum bid was set at $125,000, said Dunayer. After receiving 28 offers, the listing went to contract in the high $200s.
Publicizing the auction in advance and holding only a few open houses, so that each one is crowded, is important, said Dunayer. “If [buyers] see 40 other people getting excited about the place, it has a big psychological effect on buyers,” he said.
The process is slightly different at a co-op, where the highest bidder may not necessarily be approved by the board.
That’s why Brown Harris Stevens’ Maitland uses a strategy she calls the “highest and best” sealed-bid process.
The auction for her listing at 115 Central Park West was held over a five day-period last month with a minimum bid of $1.999 million, far less than the $3.75 million the unit originally was listed at in November. The buyer was not required to choose the bidder who submitted the highest amount, but instead was permitted to select the bidder with the best chance of being approved by the board. The co-op board at the building also required a 10 percent deposit, a cash payment of 50 percent of the purchase price and a net worth for buyers of three times the purchase price.
The sealed-bid process “provides a level of transparency and a time limit,” said Maitland. “Sometimes those are the missing ingredients to making a transaction happen in this market.”
Dollars on the table
Sealed-bid auctions aren’t the best choice for every homeowner. For one thing, they require the seller to list their apartment for significantly less than comparable properties, said Maitland.
The home has to be priced aggressively in order to “pique people’s curiosity and interest, so people will bid for it,” said Orenstein.
Sellers who want to wring every last cent of their home’s value from the purchase may prefer the traditional sale process, which allows them to play bidders off each other to increase the price.
Faster, sealed-bid auctions are “good for a seller who doesn’t mind knowing that they may have left a few dollars on the table,” said Kliegerman.
For brokers, sealed-bid auctions are more time-consuming than a regular listing, requiring them to field a large number of offers and sort through reams of paperwork.
More important, if sealed-bid auctions are used too frequently, they lose their effect. Dunayer recently held one at a two-bedroom at 120 Riverside Drive, setting the minimum bid at $995,000. After several rounds of bids, an offer of $1.4 million was accepted. But when the deal fell through because of a “lack of financing,” said Dunayer, he put the apartment back on the market for $1.395 million.
“You only get one chance” to do an auction, he said, adding that “if a lot of people start doing this, it will lose its specialness.”
Moreover, some co-op boards may not take kindly to a sealed-bid process, viewing anything that resembles an auction as “unseemly,” said Aaron Shmulewitz, partner at real estate law firm Belkin Burden Wenig & Goldman.
While some co-op boards stipulate that live auctions may not take place in their buildings, it is entirely legal for co-ops to be auctioned off, whether through a sealed-bid process or a more traditional auction, though boards have the right to reject the highest bidder, he said.
“If an apartment is sold by sealed bid or auction, the board might have a sour taste in its mouth and be predisposed to reject the highest bidder,” said Shmulewitz.
Sealed-bid auctions are popular with buyers, however, as they eliminate the negotiation process. The seller is “putting his bottom line out there publicly,” said Maitland. “His cards are on the table.”