When the gavel isn’t final

While some NYC developers attempt to unload units through auctions, bids are often just a starting point for negotiations

Mar.March 31, 2010 04:03 PM

At right: The Locale in Greenpoint, Brooklyn, is one of the New York condo buildings to auction its units recently.
When is an auction of residential real estate not really a sale to the highest bidder? The answer, it turns out, is: far more often than you might think.

With the high-profile auctions of luxury condos at the Locale in Greenpoint and Solaria in Riverdale in recent months, plus upstart auction firm Bid on the City’s $1 starting bid sale in February in Manhattan, auction fever has been sweeping New York. Hundreds of potential buyers have salivated at a chance to score a New York City home at a far-below-market price simply by placing a winning bid and closing a sale soon after.

Scratch the surface of recent residential real estate auctions in the New York metro area, however, and a far more complicated scenario emerges.

For many auctioneers in New York, these bids are serving mainly as starting points for negotiations that lead to prices far higher than the winning bids.

Developer Joseph Korff, for example, told The Real Deal he has been scoring prices as much as 40 percent higher than the high bids for apartments in the Solaria, after rejecting about half the high bids as too low. Korff had listed 54 units at auction.

High bidders are sometimes rejected if a “seller’s reserve,” or undisclosed price that bidders must meet, exists.

When bids fall short, the haggling begins.

“The auction is basically the catalyst,” said Enzo Morabito, an executive vice president at Prudential Douglas Elliman who has been conducting auctions for nondistressed properties in the Hamptons. “An auction accelerates [interest] — that’s really what the whole thing is about.”

In fact, sometimes the gap between the high bid and the final deal is so large that neither the price nor the property bears much resemblance to the auction results.

In one deal that Bid on the City ran, a bidder’s roughly $200,000 offer fell far short of the $315,000 reserve on a one-bedroom apartment. Bid on the City, which launched last year, kept negotiating, and sold that buyer a more expensive apartment in the same building, according to Vlad Sapozhnikov, cofounder of Bid on the City.

“We have a reserve on each property and if we don’t get the reserve, then the highest bid is treated as an offer, and we get into negotiation,” said Sapozhnikov.

“And sometimes we close the deal, sometimes we don’t.”

In a similar fashion, Korff said he sold a three-bedroom apartment in the Solaria to a family that changed its mind after their auction offer was accepted on a two-bedroom in the same building. The larger apartment cost 30 percent more.

“This was a voluntary discussion,” Korff insisted. “It’s not a setup.”

Sheldon Good & Company, a New York-based auction firm that was purchased in a bankruptcy sale last July by private equity firm Racebrook Capital, uses post-auction negotiations on occasion, too. Negotiations mostly take place when a developer holds an auction to jump-start sales of a new project, said Jeffrey Hubbard, senior managing director at Sheldon Good.

For Bid on the City, the highest bid in its auctions has never actually matched the closing price in a deal. Last February, the auction firm attracted widespread attention with an auction of a dozen properties with starting bids of $1. Only two properties, however, ended up with signed contracts — and those were only achieved with post-auction negotiations.

A three-family townhouse on 125th Street listed at this $1 event, with an earlier valuation of $1.6 million, had a high bid of around $500,000, according to Sapozhnikov. He said his company’s post-auction efforts increased the highest bid on the Harlem property to $1 million. That’s still a 37 percent discount from the $1.6 million price — but far less of a deal than the 69 percent discount of the top bid.

While it may seem counterintuitive for buyers to negotiate after losing a bid, the connection to the property can keep some of them interested. Others may bank on getting a below-market deal, though not as much of a discount as they had hoped for going into the auction.

Morabito recently used post-auction negotiations to sell a 31-acre horse farm in Water Mill, N.Y., which he said had languished on the market for years. Settling on a desired price range of $2.5 million to $2.7 million with the seller, Morabito drew five prospective buyers before the sale. Only two parties bid in the auction, but neither hit the undisclosed reserve of $2.7 million. Negotiations with all five interested parties after the sale, however, led to a deal with one buyer for $2.475 million.

There’s a lot at stake for both developers and auctioneers to hold successful auctions. Auctioneers shell out their own money to market a property, and a lackluster sale can result in a professional black eye. Developers, meanwhile, typically turn to auctions out of pressure to raise cash quickly — if not outright distress. Auctions are a common option after falling into technical default on loan covenants or needing to sell a certain number of units to hit a financing threshold, Hubbard said.

Developers, of course, want top dollar for their properties, while auctioneers want to set reserves lower to facilitate closing as many sales as possible at auction. These competing agendas can lead to clashes over post-auction negotiations — which is what happened at the Solaria.

Alex Abrams, a vice president at the Real Estate Disposition Corporation or REDC, which conducted the auction, said his company strongly advised Korff against post-auction negotiations.

“This seller had completely unrealistic notions of what market values were,” said Abrams, adding that the after-sale discussions were “a complete mistake.”

Korff, however, disputes that assessment. “The actual reserves were negotiated carefully by the head of the company, [REDC CEO] Jeffrey Frieden, and basically it was their nickel going forward, and if they were not comfortable, they wouldn’t have taken it.”

Korff insisted he got plenty of publicity from the sale and that the Solaria is drawing continued interest. While auction clocks tick down quickly, however, post-auction negotiations — just like typical real estate haggling — can drag on for months.

At press time, five deals had closed for the 54 Solaria units auctioned last fall, and 20 or so additional deals were pending, Korff said.

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