Our Toughest Auction of 2007
It promised to be a huge break - our first auction of a high-end property in Chapel Hill, North Carolina. Best yet, the property was in a prominent location within walking distance to UNC and there was no way to miss our conspicuous 3x4 foot auctions signs. The sellers were well known, going through an equitable divorce and two months behind on mortgage payments.
The real challenge however, had to do with events that occurred two years prior in 2005. That's when an inflated appraisal set the property's value at a cool one million dollars. The sellers, elated at the huge increase in value over the short time they owned the property, took out and spent a large equity line of credit. In less than a year they put the property back on the market, pricing it under the appraised value in order to initiate a quick sale. Over the next 18 months the MLS list price continued to drop as there were few showings and no offers.
At the time it was referred to our auction company AuctionFirst by the listing agent, the MLS list price was at $875,000. We accepted the auction project knowing that it would end up involving a short sale with the seller's lender. The terms and conditions were carefully written to reflect this complex situation.
The accelerated marketing budget of $8,000, paid upfront by the seller, was robust enough to attract both local and national interest. Special events including buyer seminars were held in conjunction with two open houses. Local companies partnered on these events and provided food, landscaping, minor home improvements and staging in return for being mentioned in the direct marketing campaign and news releases. Over 120 people toured the property during the open house events, four times the number of prospective buyers who toured the home during the previous 18 months it had been marketed conventionally. There was a lot of media interest which resulted in several interviews with local newspapers.
Auction day at the end of July was picture perfect and a crowd including many local real estate agents came to watch the action. The largest newspaper in the region, The Raleigh News & Observer, sent a reporter, photographer and videographer to capture the event. Potential auction clients all showed up to witness a real auction event prior to making their own decisions to sell by auction.
Bidders? Yes, they showed up too. But none came with the deposit required to register. One bidder raced to the bank but never returned. We started the auction on time, initiated a brief mock auction to help loosen everyone up and went through the auction terms and conditions. Then it was time to make the disappointing announcement: no bidders were prepared according to the auction terms and conditions so we could not start up the bidding; also that the auction would immediately be turned into a sealed bid auction with bids due into our office within 10 days. Altogether the live auction event was an embarrassment. Quick thinking saved it from being perceived as a complete train wreck.
Ten days later we received four bids into our office, each accompanied by the required deposit. It seemed that everyone was finally ready to play by the rules! According to the new auction terms and conditions, only the top three bidders could continue to compete and increase their bids. The lowest bid dropped out and that left three bidders, each represented by a local agent and each indicating they wanted to increase their bid. The competitive bidding phase continued via phone for another three hours and brought an additional $80,000. The final high bidder, determined at 8 pm that evening, was a Hong Kong resident represented by a local agent who had a limited power of attorney to sign the purchase agreement.
The auction results were subject to confirmation by the seller's lender. Writing and compiling the short sale package and going through the approval process with the lender's loss mitigation team proved to take over two months. The biggest challenge during this phase was keeping the buyer on board - their funds were tied up but there was no guarantee of a successful purchase. Unfortunately, the timing of the auction and short sale process coincided with the early stages of the sub-prime mortgage industry meltdown. This was followed by more bad news when USA Today wrote a front page article on how Chapel Hill values had dropped by double digits. Then came massive layoffs at the lending institution, further delaying the bank's decision.
One of the most difficult complications was the fact that the equity line was with the same lender as the first mortgage, but handled by a completely different unit. So we were attempting to work with two separate loss mitigation departments with one facing a $300,000 loss.
The lender in question had a corporate policy in place that required they work within a 90% ratio for short sale approval. This meant that the sale price we achieved needed to be within 90% of the fair market value of the property. The buyer's lender required two independent appraisals prior to closing which averaged out at $644,000. Our total sale price achieved at auction was $632,500 - within the required ratio. A closing date was set and the official lender documentation arrived via fax. That's when the final surprise arrived - a substantial reduction to our commission. The lender made it clear that this was a make or break deal - there would be no further negotiation.
Later that night, on the eve of closing, a representative for the buyer called saying they wanted out of the deal. After a two month wait they now had buyer remorse since the most recent appraisals indicated a much lower than expected property value. This picture changed once it was understood that a lawsuit would inevitably result for specific performance since the seller was a practicing attorney and the contract was iron-clad. The closing went forward the next day as scheduled and we collected a well-earned commission.
This successful auction created a lot of positive local attention. Our client felt we pulled off a minor miracle and invited us to speak to a group of colleagues which has resulted in a lot of new auction prospects. Local listing agents are calling to get educated about the Auction Option. An auction property we signed shortly after this project was successfully auctioned using the same hybrid auction technique and just closed recently for $810,000.
Would we do it again? Absolutely! It was a terrific learning curve that taught us one of the most important lessons of the year - how important it is to manage the public perception of our industry. When the onsite event failed in front of the media and such a large group of eager spectators, many could have left with the impression that "auctions don't work". That public perception had to be overcome immediately in order for our business to survive and thrive. The consequences forced to think out of the box and create a hybrid auction that is now a valuable and tested tool for high-end single family homes that works well in our marketplace.
In a buyer's market, at least in our market area, onsite auctions for high-end properties bring more spectators than bidders. In fact, for the most expensive properties, there is a very limited pool of buyers - two if we're lucky. It's very hard to bridge the gap between only two bidders in a live onsite auction format. We've found that, at least for the time being, a sealed bid format with competitive component for the top three bidders works well, allows us to get most money possible, and helps us manage public perception on high-profile projects.
Linda Mardi and Sarah Sonke
www.AuctionFirst.com
AuctionFirst specializes in selling real estate by accelerated marketing auction events.
Want to learn more about real estate auctions? Check out www.edzing.com for upcoming classes and seminars in your area.
