Residential Real Estate Auction 101: Why Auctions Will Be the Way To Sell Those Big, Huge, Over-Indulged Houses

Published February 28, 2012 by Candy Evans

As I told you last week, Champ D’Or is going to be auctioned off in a special, select residential real estate auction on March 30. The auction will be handled by Concierge Auctions, who only deal in the highest of high end properties, as I may also have mentioned. And if you are starting to suspect that auctions are the way more White Elephants Highly Customized High End Luxury Homes are going to be sold, you are absolutely correct. In fact, auctions are a great way to sell some properties.

“But you have to have a property that has the wow factor,” says Pat Kirby, with Grand Estates Auction Company. Though Pat has his real estate license only in Texas, GEA and their broker partners can coordinate sales pretty much anywhere in the U.S., Canada, and The Caribbean. Pat and the GEA team specialize in selling only via auction, which they have been doing for more than 13 years. Pat says he never desired to be a traditional agent, prefering the predictable hours at GEA. He lives in Dallas, so Pat is my go-to guru on residential real estate auctions.

The homes that sell at auctions, he says, are homes that are simply not going to sell the tradional way: list, sign, MLS, wait for buyer. They may be too specialized, or overbuilt, or in the wrong location, or the sellers have grown tired of waiting. (Sound like Champ?) But never mind all the negatives: if a home is highly desireable and you can get a lot of people excited about it in a short, defined period of time, you can sell it. There are buyers out there, qualified buyers, and Grand Estates Auction Company finds them. Increasingly, they are taking properties that have never been listed before. More and more sellers, Pat says, are coming to auction houses first so they don’t have to hassle with the time and inconveniences associated with listing a property the traditional way.

“We sell properties at absolute auction,” says Pat, “meaning there is no reserve (base price), meaning buyers determine the true market value of that home. If you have a reserve price, that’s just a fancy way of disguising the list price. I see ads in the Wall Street Journal all the time that list a reserve price. That just doesn’t get buyers excited.

The adrenaline rush comes when you have a fabulous home, says Pat, and you sell it at no reserve to the highest bidder. Buyers get caught up, thinking they are getting a REAL DEAL! It’s the same adrenaline rush that makes women fight over La Perla brassieres at Neimans Last Call. If you know something will be there for weeks, meh, you wander off and peruse handbags. But if you know there are other gals who will snatch that C-cup number with the imported lace bows ON SALE, you say, charge it NOW.

That’s how the checks get written. Another plus: auctions have a way of culling out the folks who can really afford a multi-million dollar property.

Scottsdale property

Scottsdale property pool & grotto

Grand Estates starts with 60 to 90 days of a ****load of marketing. A recent auction of an amazing contemporary home in Scottsdale — retractable roof, observatory, 4700 square foot indoor gymnasium, a backyard zip line, an eight car garage, ridiculous — got press all over the Phoenix news. Here’s how they saturated the market in Phoenix/Scottsdale: advertised nationally in Forbes, Wall Street Journal and other national media outlets, plus targeted marketing in Chicago, Los Angeles, Vancouver, Calgary, and Mexico. Print, online, direct mail, social media, public relations, signage. They plugged into their golden database of buyers. Timing was key too—the auction was planned to coincide with the world famous Barrett-Jackson collectable car auction and The Phoenix Open golf tournament –yep, that’s why I go to Pebble Beach. Pat and the GEA team (it takes all 15 employees of Grand Estates to sell each home) sorted through more than 500 phone calls that came in from all the advertising, picking through inquiries to bring together a room of highly qualified people, which he did. More than 350 groups of people trooped through the house over the course of 5 days prior to the auction before they bid on it.

Here’s what’s sweet about auctions: there is a time pressure cooker that most agents would kill to have. What if, say, an agent had a week to sell a home? How incredibly efficient would that be? First you market the bejesus out of the place. Oh and get this: the homeowner PAYS for all that marketing, yeah. Like top Realtors, top Auction Houses have contact lists of gold. Or platinum. Pat Kirby tells me his contact list is so juicy and dripping with high net worth names and contact info he literally has it insured. He has developed it over years of placing ads in financial publications (Barrons, Bloomberg, the WSJ) that caught the eye and produced feedback from every Wall Street executive, investment banking titan and Hedge Fund manager he could find. These are the folks who have the requisite $100,000 (just to register) cash sitting in the bank and don’t bat an eye at putting down a 10% non-refundable deposit on auction day if declared the winner. They are itching to buy a ski place “for pennies on the dollar” in Park City or Spanish Peaks or a Scottsdale home on a Fazio golf course with an infinity pool overlooking the mountains or a beach place in Maui. Not every buyers is your typical Hamptons-walked-out-of-a-Ralph-Lauren-ad type buyer. One buyer, said Pat,  came in wearing bermuda shorts and a tight, gross $10 tee shirt but had $2 million cash in the bank!

“Looks can be deceiving,” he says, “why we vet our buyers very carefully.”

The ideal buyers want the deals, have the cash, and can afford to hold the property until the cows come home. Folks like John Paulson and Jamie Dimon might be on this list, or their buddies.

An auction works very well if you pick the right situation.

“Trying to auction a few Highland Park McMansions all the same wouldn’t get people all that excited,” says Pat.

But the Schlegel Penthouse at the W… now that would create some excitement.

Pat has concerns about the Champ auction. For one thing, the estate has had SO MUCH publicity, all the agent and brokers who have tried literally everything to sell it. Everybody’s known about the house forever, he says. Taxes in Denton are outrageous… plus the trend in last few years has been away from the 20,000 plus square foot homes.

Ya think?

“It’s hard to say how well it will do,” he says. “If they can gather enough qualified buyers and force them to compete, they might pull it off. I’d be curious to know what the price expectations of the seller truly are.”

Concierge, he says with a twinkle, is a babe in the biz, learning as they go, kind of like President Obama. Maybe, he says, they’ll get lucky on this one. The company was formed by former Sotheby’s agents, hence the alliance with Sotheby’s corporate. (And now you see the connection to Briggs-Freeman Sothbeys, capiche?) But selling at auction is a totally different can of worms than traditional real estate sales, says Pat. Realtors might think its similar, it’s not. Realtors often are included — as they will be at the Champ sale.

“The broker who repped our buyer in Scottsdale said, ‘this is such a different animal than what I’m used to.’,” says Pat. “You are basically hiring an advertising agency to sell one property at a time. You are using the auction methodology to drive prices up. There needs to be lots of marketing methodology to create interest in the property. Then you are pinning one (qualified) person agaisnt the other to drive the price of the property as high as it will go.”

Sounds like walking a really delicate tight rope.

So, I asked, at Grand Estates you never have a reserve? Sometimes, yes. Depends on the situation, said Pat. Every situation is different and tailored for the particular property for sale.

And there are many ways to do an auction. There are sealed bid auctions, published reserve auctions, non-published reserve auctions, absolute auctions, and seller confirmation auctions. There are even Dutch auctions, better known as reverse auctions, where the auctioneer starts at a high number and go backwards until someone throws their paddle up in the air, like a game of chicken. Pat says an absolute auction works best.

So what will happen to our precious Champ? And why didn’t it sell in almost ten years of marketing in the hottest real estate market of all time?

Champs is in the wrong location, says Pat. They broke, he says, the cardinal rule of real estate: location location location. The owner cannot recoup the investment. Put $50 million in a home in Hollywood Heights: you’re not going to get it back.

Pat remains bullish on the Texas real estate market. In Texas, he says, we learned our lessons back in the 80′s, which is why we didn’t fall as hard this time. We didn’t let our prices go nuts like other cities did, and our economy is better than most. He tells me about a call he had last week from a guy in the smack center of Michigan, in a place called Lupton. Has a 12,000 square foot home, has $10.9 million in it, wants out. He’s in the middle of the fricking state, no runway for a Lear — a Lear needs at least a 5500 ft runway. No Lear, hell, there’s not even a commercial airport nearby.

“We can’t help this guy” says Pat.

So how do these auction agents make money? We have established that a real estate auction takes a buttload of investing in advertising, PR and marketin. (Concierge, the newbies, have hired Rubenstein PR for the Champ Sale to make sure every corner of the high net worth earth knows about it.) But that is covered by the seller, who often finds the marketing costs cheaper than the carry costs of the property — insurance, taxes, mortgage payment, etc. Consider this: it cost Dallas brokers at least $100,000 in marketing costs every time they listed Champ. Pat recently completed another similar lickety-split sale in Sea Island, Georgia, where the seller did not want to even try selling traditionally: he just wanted out. Auctions are huge with second or vacation homes. Auction houses charge a 10% buyer’s premium. This is a fee added to the high bid.  It’s paid by the buyer, and goes to the seller to offset expenses/commissions  — for GEA it’s 10%.

Pat Kirby says we will see more huge homes sold at auction. He believes that for these homes, traditional selling is not going to work. An auction is much more proactive, overturning all the rocks out there.

“It’s like fishing,” he says. “Fishing with dynamite. You bring all fish to the surface, take the biggest fish and put them together on auction day.”

In traditional selling, you sit and wait and wait and wait for a nibble on the line. If one comes, great. But you may never get a bite!

The auction, if done well, marketed correctly, gets far more exposure for a single property than a regular sale. The producer of the ten o clock news could care less about a $1.5 million home on the market unless it happens to be the late Mary Kay Ash home. Or Champ with that Chanel closet and bowling alley. That’s what it takes to get on all news casts, pull 500 inquiries yielding 350 groups previewing a property of QUALIFIED BUYERS.

It’s Psych 101: buyers need a deadline, a sense of urgency. It’s a trigger to make a sale happen in a specified period of time and generate tons of inquiries.

“Our job is to sort through them,” says Pat. “Everybody signs in, we ask how they heard of the auction when they sign in. Then we research them, along with all the people we have been talking with prior.”

Oh and this is not a contingent sale: you bid, you buy. In Scottsdale, it came down to 12 qualified, registered bidders bidding against each other. Serious business: many there there with their FA’s.

Scottsdale sold for $4.62 million, Who knows, says Pat, what they could have sold it for the traditional way. Who knows if they could have gotten anything higher? The agents got their commissions, marketing fees paid by seller. Grand Estates claims over a 93% success rate with 60 to 90 days to prepare.

“People are so used to not paying anything to sell a home,” says Pat. “I mean they are paying it, but the costs are hidden. “

— Daily Local Real Estate Dish By Dallas Real Estate Insider — Candy Evans at CandysDirt.com