The willingness of distressed developers to resort to real estate auctions puzzles me.
I also wonder why a consuming public puts up with them.
But I don’t doubt why the companies that run auctions love them: money, of course.
Prompting this screed are three things: 1. A blogger for the New York Times called to interview me about auctions; 2. A couple of auctions have been scheduled of condos in East Harlem; and 3. I noticed an advertisement just yesterday for 10 properties in the outer boroughs.
The pitch that the auctioneers make to developers is that they can benefit from instant establishment of the market value of their properties.
If the developers decide against selling out the building or don’t accept some of the bids, they’ll know exactly what to charge for the remaining units. So goes the pitch.
All they have to do is dangle before buyers a few apartments in their building as available “absolute,” the auction companies contend; that strategy guarantees the seller’s acceptance of the winning bids. Other units will be offered at the same auction with ridiculously low minimum bids, but the developer retains the right to reject the eventual winners.
In either case, buyers can be counted on turn out in droves in the hope of snaring a bargain. They are doubtless the same buyers who shun bidding wars in horror.
Yet an auction is nothing more than a bidding war.
True, a few buyers — even many at times, depending on circumstance — buy property at a good price. But they have to add to their purchase price steep commissions, usually in the double digits, which otherwise are paid by sellers in the normal course of real estate sales.
The rest of the buyers are losers, who walk away disappointed.
Losers, too, are the developers. Those who opt for auctions have stubbornly clung to asking prices way above the market.
For those building owners, auctions produce a reality check that no developer with any marketing sense should need.
Such developers ignore a basic precept of sales: If you price something low enough, they will come.
Any smart seller will understand that, because only the market as a whole determines the value of a property, there is virtually no danger in underpricing well marketed real estate: competitive offers will drive up the price to the level of its value.
At auction, minimum bids can prove mighty tempting, if in a sense deceptive, to a gullible public. I’ve seen them for less than half of what the developer had listed. Don’t you think price chops of such a magnitude from asking prices would create bidding wars just as robust as are created by auctions?
I am frankly puzzled that developers don’t save themselves all the money that they pay to the auctioneers and don’t don the halo of failure that they bring on themselves by going to auction.
The big winners in the whole undertaking are neither the developers nor the bidders. It is the auctioneers, who rake in the high fees that they command from both sides of a sale.
As for the buyers who keep showing up with fantasies of a bargain dancing in their heads, I suppose the rubric holds true that hope springs eternal.
Pity those who overpay. They are the ones who are subject to auction fever (which, ironically, distorts information about true market value), failing to heed the latest sales data.
Actually, there’s plenty of pity to go around.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022