BUYER’S REMORSE Take care when dealing with existing condo owners at a project with units slated for auction.
Say you bought a condo a year ago. You open the paper and see that your developer is now auctioning off the remaining unsold units in your complex for a fraction of the price you paid. You wouldn’t be happy.
“An “An auction drives down all of thea pric prices for the people remaining,” says Jack McCabe, CEO and managing partner of McCabe Research & Consulting in Deerfield Beach, Fla. “In many cases, they’re losing downpayments, and they’re upside-down in the units—their mortgage am amount is greater than what their their u unit is now valued at.” Stuart Gruendl, founding partner of Oakland, Calif.-based BayRock Residential, recognized the potential for disaster during an auction at his Eight Orchids condo project. So he chose “to t take care of existing residents.” The first step? Convince them that units sitting empty wouldn’t help their property values. He relied on his auction company to help educate the existing owners.
“The auction company walked them through the process,” Gruendl says. “They tell them how having sales velocity and residents here will support their values.”
Gruendl says the strategy worked. He received no negative responses from the 20 pre-sold units in Eight Orchids during the auction. Dan Gumbiner, president and CEO of Orion Residential, a multifamily firm based in Chicago, had a similar experience with his auction of EOS Twenty-One, a conversion in Alexandria, Va.
“The auction company did a nice job of contacting all of the residents with a letter [and] explaining the process,” Gumbiner says. “They held a series of meetings [and] explained that having people who would be owners would have a positive impact on value rather than having empty units and investors who would eventually rent at lower rates.”
But in the long run, despite lots of educational outreach, existing owners must realize the realities of today’s real estate market. “Most people understand the market today is not what it was two years ago,” Gumbiner says.
STEP BY STEP Looking to auction off units in your stagnant condo project? It can work, but keep these thoughts in mind before you jump in.
- Find a reputable auction company. You need to know the track record of the company you choose, as well as their market expertise. Make sure they’ve worked with companies in your situation. “I would be very careful and very diligent about who your auction company is,” says Dan Gumbiner, president and CEO of Orion Residential, a multifamily firm based in Chicago.
- Hold your ground. The auction company’s job is to help determine the right auction price, but Gumbiner cautions that it shouldn’t get full power. “Make sure you have absolute, total control over what happens that day,” Gumbiner says.
- Know the market. To determine how many units you’re going to put on the block and at what price, you need to know what’s happening in your submarket. “You need to understand the depth of your market and try to figure out where your product fits in,” Gumbiner says.
- Enlist the reserves. The auction company will put effort into marketing your product, but Gumbiner says you can’t rest on its laurels. “You need to have your top salespeople on the site,” he says. “You want your best people involved in the process.”
- Lead the way. If the market worsens, more companies are likely to pursue auctions. If an auction hasn’t happened yet in your market, try to be the first. “The key to doing this [our auction] was to be first in the submarket because so many people are going to be doing this soon,” says Stuart Gruendl, founding partner of Oakland, Calif.-based BayRock Residential, a multifamily investment firm.
