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As home to the flagship locations of Christie’s and Sotheby’s, New York is no stranger to the auction business.
When it comes to real estate, though, auctions of new condominium units — commonplace in cities across the United States for a few years now — have not been seen in the city with any regularity for nearly two decades.
However, according to auction professionals, brokers and developers, the phenomenon, which the New York Times also just looked at, is likely to gain a toehold in the New York market in the coming months.
“Auctions are inevitable in New York,” said Jon Gollinger, the co-founder and East Coast CEO of Accelerated Marketing Partners, a marketing firm that conducted more than 40 real estate auctions last year in cities including Boston, Washington, D.C., and Los Angeles.
“The New York market is in a state of stunned disability,” he said. “No one knows where prices are. Those who want to buy can’t buy, and it’s irresponsible to buy because you don’t know what to pay. Auctions are going to be one of the only ways to create movement.”
Just a few condo auctions have taken place in New York City over the past couple of years and none on a large scale, according to auction professionals. A small condo auction was held in Brooklyn last September, as The Real Deal reported, when a Brighton Beach developer auctioned four units in his six-unit building, with bids starting at less than $300 a square foot.
More recently, developers have increasingly weighed bulk sales of condos or auctions of whole buildings. The developers of the Financial District’s 20 Pine reportedly put 80 of the building’s 413 units on the market a couple of months ago, and the 1,230-unit Riverton Houses complex in Harlem was set to be auctioned off last month, though the auction was later canceled.
Typical condo auctions, however, are different from bulk sales or full-building auctions in that their aim is to sell units to individual buyers.
Andrew Gerringer, a managing director of Prudential Douglas Elliman, said he sees auctions as “another tool in my belt to help my clients sell their inventory.” The process, he said, would involve his on-site sales staff both before and after auction.
Gerringer said he was involved with New York City real estate auctions in the late 1980s and early 1990s, and said he believes that by clearing out a lot of inventory, they “helped bring the market back to health much quicker.”
And he thinks the time for auctions has probably come again.
“I have been meeting with numerous developers, financial institutions and equity and mezzanine lenders, and I can definitively state that most are very receptive and intrigued by the process and are seriously considering it a very viable option for them, given today’s market climate,” he said.
Gerringer added: “While I believe that it’s not for everyone, nor for every product type, I do know that it certainly has its place and I’m pretty sure that we will see it happening in New York City some during the next six to nine months.”
‘Precipice of change’
Auctions of condos typically involve a pre-auction marketing blitz with open houses. At the auction itself, units are either put on the block with a reserve price — which assures the developer will make a minimum amount on each unit — or through what is called an “absolute auction,” where condos are sold to the highest bidder, regardless of the amount they have bid.
One potential roadblock to the auction process is pricing. According to Accelerated Marketing Partners’ Gollinger, a “delicate dance” takes place among his company, lenders and developers so that auction reserve prices can be lower than a condo’s prior release price.
“Our minimum bids are always below the release price, and developers and banks have been more than willing to give that to us,” he said.
Gollinger said his firm “is talking with a lot of developers” in New York City who are interested in holding auctions to sell condos that have been languishing on the market, though he declined to name any of those he has spoken with.
Other auction companies and brokers confirmed that New York developers are considering auctions as a sales option.
Josh Olshin, president of Tranzon Integrated Property Group, a real estate auction company that has conducted condo auctions in major metropolitan areas across the U.S., said condo auction activity in New York is “on the precipice of a major change” and that his firm has been approached by several developers “who we know are serious about auctions because we’re not the only auction guys they’re talking to.”
Olshin said the stagnant volume of new development sales in New York over the past couple of months is producing a market ripe for auctions.
Craig King, president of Alabama-based J.P. King Auction Company, said his company also has been holding meetings with New York developers.
Auctions tend to appeal to developers who have sold out most units in a building and are putting as much effort into, say, selling the last 20 units as they did the first 100, King said. His company takes a percentage cut of each condo auction sale. Developers pay for marketing expenses.
King said his company advertises extensively for a couple months leading up to auctions, which are usually held in hotel ballrooms. In addition to in-person bids, offers can come from telephone or Internet bidders during the auction. “Developers love the process because they have closings within 30 days,” he said.
Gavel stigma
The chief draw of auctions, Gollinger said, is that they aid in determining market value for condos when almost no deals are happening, because pricing is a great unknown.
“We sell a critical mass of 30 to 40 units in an hour, an hour and a half — that sets the value,” he said. “The only way to do it is with a critical mass of sales. What we do is cause the market to be able to see the floor. And if you see the floor, you can have movement. You need to understand where the value points are.”
Auctioneers concede, however, that the process is not without potential pitfalls, and that auctions are sometimes not successful at selling condos.
“Local knowledge is very important,” said Olshin. “A lot of auctioneers try to Come Into A New Place and just repeat what they’ve done in other cities, and it doesn’t work.”
Gollinger noted that the few unsuccessful auctions his company has presided over involved marketing a product to the wrong demographic.
“If we misunderstand or misread the product — like, say, thinking young people would want to live on East End Avenue — then we fail to deliver the correct kind of response,” he said.
Jon DiFiore, a senior vice president with Real Estate Capital Partners, a New York-based investment advising firm that also provides equity for developers, said auctions have worked well in several instances for condos that his firm has financed.
As an example, DiFiore pointed to an Accelerated Marketing Partners auction in mid-November for a West Palm Beach condo his firm funded, where the goal was to sell 80 units.
“We sold 37 at the auction, and we have been selling more since then,” he said. “We use auctions to break a logjam.”
DiFiore said that while his firm has not yet sold any New York City projects via auction — Real Estate Capital Partners has invested in such properties as the 47-unit Chelsea Modern, on 18th Street, which was nearly sold out as of late last month — it might consider it in the future.
“When sales come to a standstill, that’s when the auction can be used effectively,” he noted. “That really hasn’t started until recently in New York.”
Although residential sales in New York have slowed dramatically in the past several months, the city hasn’t experienced a protracted standstill coupled with devaluation, as places like South Florida have.
Gollinger said auctions are easier to set up in other cities, as New York is unique in that “the market has just stopped abruptly.”
In terms of buyer financing, auctioneers said they work to ensure their events draw qualified buyers before auctions, typically by involving bidders who can either engage in all-cash transactions or having them pre-qualify for mortgages before the auction.
“Auctions are for qualified buyers only, and we usually have a 5 to 10 percent nonrefundable deposit,” King said.
For buyers who do need mortgages, King and others said they usually make bidders pre-qualify with lenders before an auction, and they have bank representatives on hand during the event.
While auction professionals acknowledge that the process may seem like bad publicity for developers because it indicates that typical sales strategies have not been effective, they say auctions can be win-wins for buyers and sellers.
“Auction has a certain undeserved stigma,” said Tranzon’s Olshin. “Even if developers are going to get decent pricing through them, it’s kind of a public acknowledgement that your project has stalled. But what they allow you to do is avoid mounting carrying costs.”
Olshin said brokers also have tended to be wary of auctions. “Brokers for the most part have been very resistant and have accentuated the stigma of auctions,” he said.
But he says this is changing, and that more brokers are reaching out to auction companies.
The process does not necessarily signal the end of broker commissions, since most auction companies allow brokers to represent bidders. In addition, in many instances brokers continue to represent developments post-auction and can have a hand in sales of units that did not sell during an auction.