To Auction or Not to Auction? That is (Often) the Question
Posted on April 14, 2014 Leave a Comment
The article posted below was originally published on DailyProperties.com in January, 2014…
Auctions are traditionally considered an end-game strategy for the sale of residential real estate, especially for luxury properties. Typically, a seller first checks other strategies off the list – whether they are price reductions, a change in listing brokerage, or other methods – before deciding to offer the property for sale at auction.
There are many reasons real estate auctions are viewed in this fashion when it comes to the sale of multi-million-dollar properties. After all, auctions were the chief tool used to liquidate many properties during the Great Depression, and the images of those sales on the courthouse steps have burned deep and lasting impressions into America’s memory. Additionally, financial institutions and courts still hire auction companies to perform ”bulk” or “liquidation” sales in order to clear excess real estate inventory or to jettison unwanted or non-performing real estate assets, mostly at very low price points.
However, there has always been a relatively small, but strong contingent of the real estate auction marketplace dedicated to the sale of multi-million-dollar properties on behalf of sellers who are not in any type of financial distress. In recent years, the niche occupied by these firms has been growing, as more wealthy property owners begin to understand the important role auctions play in luxury real estate markets.
Despite the growth of these firms, there is still some debate about the real estate auction process, and how it compares to the traditional listing process. While there are many metrics by which these methods of selling real estate can be compared, the following are the chief points on which a simple comparison can be made. (Keep in mind this analysis is primarily geared towards the sale of multi-million-dollar properties, which come with their own unique considerations that may not apply to the broader real estate market).
1. The “Time Value of Money.” While this principle has been explained in many different ways, it essentially focuses on the value (or buying power) of money today, versus the value (or buying power) of that same amount of money in the future. In many luxury marketplaces, especially secondary home or vacation areas, listings languish on the market for extended periods of time. Unfortunately, time literally is money, as there are significant costs to carry and maintain these properties, which over time chews into the total amount of cash the seller ultimately gains upon sale. In an auction, a sale is often achieved within 4 to 6 weeks, with the closing 3-5 weeks thereafter. This dramatically reduces the seller’s costs of carry and in turn, increases the cash in his pocket upon sale.
2. Certainty. In the traditional listing process, there is almost no sense of certainty. After the For Sale sign is placed in the front yard and the initial burst of brokerage marketing is completed, even the best agents often resort to playing the waiting game until a buyer (hopefully) comes along. There is no ticking clock and no time pressure on the buyers to perform. In an auction, there is a specific date of sale and a well-defined timeline on which the property is marketed to the public. This creates tremendous time pressure, which forces buyers to perform when they otherwise might have sat back and waited for yet another reduction in the listing price.
3. Confidence in Finding Real Market Value. Often times, it is difficult to identify the market value of unique luxury properties. As such, real estate agents and sellers often list properties at the highest potential price (a figure which is rooted largely in guesswork rather than in verifiable data). This places them out of touch with real buyers, who always view the seller’s property through a different lens. As a result, offers from buyers are rare, and when they do come, they are likely based on the buyer’s best attempt at a metrics-based price, which is often not aligned with the seller’s potential price. In a properly staged auction, buyers are encouraged to name their own price for the property. When the thorny issue of asking price is removed from the equation, previously disinterested or hesitant buyers become excited about the opportunity to place their own value on the property without worrying about market metrics or what the seller wants. This results in a pool of buyers who are vying for the property at the same time (that is, Competition: every listing broker’s dream). Through the competitive bidding process, the true market value of these unique properties is discovered. And because many buyers have competed to pay the (presumably) highest and best price their competition will bear, it creates a quite literal definition of the term True Market Value, giving the seller confidence that he has sold for the right price.
4. No Negotiations. No Contingencies. No experienced luxury real estate professional ever counts his money until the closing has occurred. This is because high-net-worth individuals are especially shrewd negotiators. They’re also particular about their inspections and due diligence. As a result, more than half of the contract offers for luxury properties never make it to closing. In an auction, there are no such negotiations or contingencies. The terms of the sale are generally very straightforward, and much of the due diligence has been done in advance for the buyer’s review. The buyer then owns the property once “the hammer falls” at the auction, and risks a default and significant financial penalty if he does not close on the property. Because of these stiff penalties in a buyer default, it’s extremely rare for an auction buyer to rescind on a purchase.
5. The Best of Both Worlds. One of the most important points to consider when comparing auctions to the traditional brokerage process is in fact not a point of comparison at all. Most luxury auction companies endorse a “Best of Both Worlds” approach in which the auction firm and the existing listing brokerage cooperate for the auction sale. This offers the seller a myriad of benefits, such as two streams to source buyers, two marketing prongs, and additional manpower. Not to mention, as most auction firms operate at a regional or national level, they do not possess the intimate, nuanced knowledge that is required to effectively operate in some of these luxury niche markets. The “local” agent can therefore bring his precise market knowledge into the auction program, amplifying the auction firm’s procedural expertise with his geographic market expertise.
About the Author: Trayor Lesnock is the president and founder of Platinum Luxury Auctions, a market-leading auction firm based in Miami, Florida. Throughout more than $325 million in completed luxury auction sales to date, Mr. Lesnock has been dedicated to upholding the highest standards of excellence and integrity in every transaction. This approach has become a hallmark of the Platinum team. The firm focuses exclusively on the sale of multi-million-dollar properties on behalf of wealthy, non-distressed sellers. Learn more at PlatinumLuxuryAuctions.com.
Clank! The Curious Case of the Failed Michael Jordan Auction(s)
Posted on January 10, 2014 Leave a Comment
Like most youths who grew up with a basketball in their hands for at least six months out of each scholastic year, I’ve always considered Michael Jordan a true sports icon, perhaps THE sports icon. A man who, using God-given talent combined with an uncanny inner drive and competitive spirit, elevated his sport to a new level forever.
This personal admiration, combined with the fact that I own and operate an auction company that services clients like Mr. Jordan, caused me to be tremendously interested when I learned that his Chicago residence would be offered for sale without a reserve price in a November 2013 auction. My interest was piqued further when it turned out that the planned auction date of November 22 was postponed due to “interest stronger than anticipated.” Further, when the newly scheduled auction date was announced for December 16, it came along with a reserve price of $13 million, a far cry from an auction without a reserve. Ultimately, the property failed to sell…
Whenever there is a high profile real estate auction such as this one, I receive a tremendous amount of inquiries on the who/what/why from folks in the real estate industry. This is in fact why I wrote my first blog post about the Versace Mansion auction. (And of course, the inquiries always increase in volume when such an auction is perceived to have gone awry, as was the situation with Mr. Jordan’s estate).
In this case, most questions I received were related to how an auction marketed without a reserve price – which means the property would sell for the highest bid, regardless of the amount of that bid – would be: 1) Rescheduled at the last minute due to “strong interest,” and 2) Converted to an auction with a reserve price for the newly scheduled date. For most folks, the situation did not align with common sense. That is, a protective reserve should not be needed for the rescheduled auction if there was already such “strong interest” from the first auction attempt, right?
The matter was compounded by the fact that some inquirers also recalled how the firm that handled Mr. Jordan’s auction also failed to sell another massive Chicago property in 2011 that was clearly marketed as an absolute auction (which is another term for an auction without a reserve price, and wherein the property will sell to the highest bidder regardless of price). At the time, a spokesperson for the auction company was actually quoted as saying the sellers “decided not to confirm the high bid,” which directly and entirely conflicts with the definition of how an absolute auction works. As to what happened in that instance, this author does not know, but it certainly adds to the intrigue regarding the failed Jordan sale(s).
The confusion shared amongst the inquirers was certainly not mitigated by the mass media. Rather than asking pointed questions (something the media usually does well, if not excessively) about the nature of the attempted sales, the major news outlets instead gobbled up and regurgitated whatever publicity sound bytes they were fed by the folks handling the sale (and boy, did the media pick up the story!). Eventually, however, a few journalists and bloggers did remark on the unusual nature of the postponement and the change in terms, including TMZ.com and ChicagoNow blogger Gary Lucido. TMZ perhaps said it best when they commented on the unusual dips and turns of the process by simply stating, “yeah, we didn’t get the strategy either.”
So, in the voice of so many of the inquirers, what did happen? How did a beautiful estate located in an upscale community in one of the nation’s most vibrant cities – and, a’ hem, that was owned by Michael Jordan and offered for sale at ANY price – fail to sell? (They asked).
The short and fair answer is that it’s hard to say what really happened unless you are a party who was specifically involved in the transaction. Further, I am sure that more than one attorney will come calling if this author ventures into the gray area to speculate as to why this sale was a failure (twice), so there will not be any such speculation here.
A very simple and plausible answer is that Mr. Jordan did initially sign up for an auction without a reserve, hoping for the best. When the given bidding audience then presented itself to register in advance for the November 22nd auction, that audience was likely not impressive enough for Mr. Jordan that he was confident in presenting his property to those bidders at any price. Distilled even further, he likely feared the price would be “too low,” whatever his perception of “low” may be.
Now, is this type of pre-auction evaluation and decision-making by the seller a legitimate component of a true auction without a reserve? Typically, no, and I’m sure many of the prospective bidders were not counting on this either. A true auction without reserve means that as long as the bidders have complied with the terms of sale, they can proceed to bid on the property without restriction or rejection, and the highest bidder shall prevail. But again, only the parties involved in the sale have the complete story on that matter.
Of course, any good auction company works as hard as it can to produce a sale, so the rescheduled date was the auction firm’s attempt to do just that, and to give His Airness another chance to perhaps find the right bidding audience. Generally speaking, this makes good business sense. (The choice of the parties to couple the rescheduling with such “strong interest” was the heavy dose of spin that caused most folks to furrow their brow. Understandably so).
Mr. Jordan was obviously patient enough to give the auction a second chance, but this time he elected to have the pricing protection of the $13 million reserve price. (Given that he ultimately relisted his property for $16 million, we can consider the new reserve to be pretty darn conservative, and likely not perceived as much of a “deal price” by the prospective bidders).
So in essence, one would likely be best served to conceptualize this as a case of two separate auctions for the same property, each auction having different terms. The auctions were simply so close together, and drenched in such a heavy dose of publicity spin, that it was difficult to view the process in this regard (that is, rather than as one elongated, confusing process). Keep in mind this is merely the opinion of the author. The facts will likely remain under lock and key amongst the parties involved in the sale.
In any event, Mr. Jordan has re-listed the property for $16 million. I sincerely wish him the best of luck.
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Demystifying (Most of) the Versace Mansion Auction
Posted on September 20, 2013 1 Comment
At the urging of friends and associates, I have finally entered the world of industry-specific blogging. What better way to make an entrance (I think) than to write about the recent auction of the famed Versace Mansion property in Miami Beach? So without further ado, let’s begin. . .
Lovingly anointed Casa Casuarina, the highly publicized property was sold at auction on September 17, 2013, and since that time I have been party to a flurry of discussions amongst real estate professionals regarding the sale. In this article, I attempt to dissect and explain various elements of the sale, as seen from the inside perspective of auction industry expert.
First, I should qualify my ability to speak on this topic. I am the founder and owner of a firm whose specialty is selling multi-million dollar properties at auction. To date, I’ve been responsible for the sale of more than $325 million in luxury property at auction, and have consulted or advised on nearly $1.25 billion in additional luxury property sales.
While my firm specializes in selling these properties for their wealthy owners (not on behalf of the courts, as was the case of the bankruptcy auction for the Versace Mansion) many of the core elements of the auction process are the same, at least for the sake of this discussion.
(Important Industry Side Note: This was a bankruptcy auction, and the bankruptcy process can often be very complex. I do not profess to possess a mastery of all of its moving parts. I am more focused here on the auction process itself).
Before I analyze the auction sale, let’s address a few items. First on the list: The perception of these types of real estate sales by the media. Thus far, the majority of the press I have reviewed on the Versace Mansion sale follows what I consider to be the Great Media Paradox. That is, while we all want to be happy, we all love to read bad news.
The media seems to be especially keen on this phenomenon when it comes to real estate reporting in general. As an example, look no further than Alex Rodriguez’s $30 million North Bay Road mansion sale in May 2013. Nearly all of the initial media reports focused on how much of a “discount” the sale price was to the $38 million list price, NOT on the fact that the sale earned A-Rod a $15 million profit – double what he invested in the property – in less than 2 years! Oh, and it was an all-time record price for homes located on North Bay Road. (In fairness, subsequent reports swung to the positive side and did focus on A-Rod’s big profit).
The Versace sale was not immune to this Paradox, as most initial reports – written or verbal – talked about the auction’s sale price of $41.5 million* as compared to it’s original list price of $125 million: a “huge discount,” so the stories went. (More on that list price below. *I should also note, in a bankruptcy sale, the judge must approve the price and terms. So while the property is not yet formally “sold” as of the posting of this article, sources indicate the courts should approve the sale price rather swiftly).
Next, let’s also address the nature of the process that lead to the ultimate auction result. In this case, we must first consider that the property was listed with The Jills of Coldwell Banker. The Jills are quite literally one of the most effective luxury real estate sales teams in the entire world, and they have the numbers to support that claim. Reason would stand to dictate that if anyone could find a buyer in the world who desired the Versace Mansion, it would be The Jills. As for the original list price of $125 million for the property, I would have to assume that was a pure publicity play. The Jills did not become The Jills by being foolish, and while I’m sure they knew that list price was exceptionally lofty, they also knew a $125 million list price gets more global press than a $50 million list price. Global press can deliver global buyers.
In addition to The Jills, we add the element of the auction to the equation. As many of us in the auction industry consistently prove, there are few better ways to ferret out wealthy purchasers than to offer an illustrious real estate asset at auction. While we all love a deal, the wealthy (and especially the ultra-wealthy) relish the opportunity to obtain something at a bargain price quite a bit more than the rest of us. (For a reference on the “auction attracting wealthy buyers” phenomenon, examine the work performed by the Christie’s and Sotheby’s auction houses for the past few hundred years).
In the case of the Versace Mansion auction, the required starting bid of $25 million was not necessarily a bargain price, but the type of bidders drawn to a bankruptcy auction are generally not deterred by the published starting bid amount, as they know that in these types of auctions they are dealing with a seller (that is, the creditors and courts) that are very motivated to sell. If they were not motivated to sell, the process would not have been initiated in the first place.
(Important Industry Side Note2: The Jills and the auction firm worked together hand-in-hand on the sale, and each entity earned a sales commission. Despite what many real estate salespeople may think, this type of agent-auction harmony is the method by which nearly all high-end real estate auctions operate).
Now let’s address the most important item: price. As noted above, the Versace Mansion auction generated a price of $41.5 million, a far cry from its original list price of $125 million, and even from its reduced list price of $75 million at the time of sale. There were 3 bidders at the auction: The Nakash family (the winning bidder, and also the original, majority debt-holder on the property), Glenn Straub (the owner of Palm Beach Polo and a notoriously successful distressed property investor) and Donald Trump (who needs no introduction). But what does that $41.5 million price mean? Was the sale a “big discount?”
In my (perhaps biased) opinion, the answer to that last question is No. In fact, none of the real estate veterans with whom I have spoken on this topic felt that the sale was anything other than a very successful one, if not an overpayment by the Nakash family. Let’s look at some numbers and see why that might be the case.
In doing so, let’s first remember what the Versace Mansion is: a single-family home. Numerous attempts have been made to make it something more than just a residence (ranging from a restaurant to an ultra-luxe boutique hotel), and those attempts have all failed (as noted by the South Florida Business Journal in this insightful article). In addition, zoning codes in this area of Miami Beach do not permit high rises, so the value of the land is rather limited in terms of a development perspective. That leaves us with a single-family home.
Let’s consider the location of that home. The Mansion, at 1116 Ocean Drive, is located in a very busy area of Miami Beach, where there would hardly be any significant degree of separation between the owner(s) of the Mansion (surely a “1%-er,” in the new financial parlance) from the remaining 99%. The music nearly always blares and the action is nearly always robust on this part of the beach, to state it politely. When the new buyer of A-Rod’s residence paid $30 million, he knew he’d be living in privacy and exclusivity alongside A-list celebrities and business titans. In the case of the Versace Mansion, the owner would be more likely to interact with intoxicated college kids on spring break than with Matt Damon or a hedge fund manager.
Now, how about those numbers? In general, a sale price of $41.5 million for a single-family home in Miami would have been completely unheard of it if occurred 1.5-2 years ago. But this is M-I-A-M-I, where the words “white hot” are once again used to describe the luxury real estate marketplace (not just the basketball team).
This is because within the last 2 years, the ultra-wealthy have decided Miami is hip again (or more likely, that its ultra-luxury real estate is a safe haven for their cash). As such, the Miami market has seen 6 sales of single-family homes – not including the Versace Mansion – occur above $16 million within the most recent 2-year period. This includes 2 sales at $30 million (42 La Gorce Circle and A-Rod’s former estate at 4358 North Bay Road), one sale at $38.4 million (14 Indian Creek Drive) and the all-time price record of $47 million for 3 Indian Creek Drive. While these sales occurred in Miami’s toniest areas, where privacy and exclusivity are the top priorities, only one of them exceeded the Versace price. That makes Versace – with all of the comparative downsides listed above – Number 2 All-Time.
As a TV pitchman would say, “But wait, there’s more.” In addition to ranking 2nd all-time in gross sale price, the Versace Mansion also placed 2nd on the more telling price-per-square-foot (“ppsf” or “psf”) basis, when compared to the 6 illustrious properties listed above. The Mansion achieved a value of $1,768.82 psf. On this per-square-foot basis, it was only beaten by 14 Indian Creek, which clocked in at $2,159.12 psf. (Note: These calculations assume all square footage measurements in the Multiple Listing Service and County tax records are accurate).
In summary, the Versace Mansion auction sale ranked as Miami’s 2nd-highest single-family-home sale of all time on a gross sales basis, and 2nd on a price-per-square-foot basis as compared to the highest priced single-family home sales within the past 2 years. It achieved all of this while being smack-dab in the middle of one of Miami Beach’s busiest, noisiest and most publicly trafficked areas.
Not exactly a discount from this perspective, is it?
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