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| January 07, 2008 |
By: Paola Iuspa-Abbott |
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hen Shannon Ford moved from New York early last year, she began looking around for a condo to buy in downtown Miami. She spoke with real estate agents, read real estate blogs and soon learned about the potential cost-saving benefits of auctions.
Teamed with a broker, Ford, the director of human resources for the law firm Squire Sanders & Dempsey in Miami, began attending auctions at hotels and convention centers in South Florida. Ford never imagined she would buy her first home that way. But last month she raised her bidding card and, at $185,000, became the top bidder for a one-bedroom condo in the Isola Island Residences on Brickell Key off Brickell Avenue. The closing is scheduled for later this month.
Shopping for real estate is always a trial, but buying a property at an auction — whether a foreclosed unit sold by a lender or a new condo offered by a developer with too much inventory — comes with a special set of challenges.
“I would recommend it,” Ford, 31, said of the auction process, “but cautiously, because you have to do the due diligence.”
Investor Johannes Badrutt hoped to find a bargain or two at a September auction held by the developer of the Platinum Condominium in Miami’s Edgewater neighborhood. Maysville Inc. had hoped to sell out the last 20 units of the 119-unit project completed in 2006. Badrutt was eager to buy and bid the highest price for two units. He quickly put down nearly $67,000 in deposits. But a few days later, Maysville President Alex Redondo rejected Badrutt’s bids, claiming irregularities with the deposits. The deal is now in court. Badrutt has filed suit, seeking to force Redondo to honor the deal.
Ford and Badrutt’s circumstances highlight some of the opportunities and challenges of using auctions to purchase homes and condos.
Auctions are poised to become an alternative to conventional purchase strategies as bargain hunters seek to take advantage of the worst U.S. housing slump in 16 years.
South Florida, always prone to boom and bust cycles, is one of the hardest hit areas in the nation. Because of the cheap availability of money early in the decade, condo developers launched dozens of projects across the region, especially in downtown Miami and the city’s Brickell area. Now thousands of new condos are coming on line, and developers are facing a glut of units either unsold or abandoned by their buyers.
An increasing number of South Floridians are losing their homes as lenders recalculate adjustable rate mortgages. More than 5,300 foreclosure filings were recorded in December, for a fourth-quarter total of 14,527, according to Daily Business Review data. The region recorded less than 12,000 foreclosures in both the first and second quarters of 2007.
Jittery lenders, facing increasing delinquencies, reacted last summer by tightening mortgage standards, which made it harder for buyers to get financing. With fewer qualified buyers in the marketplace, developers are struggling to sell empty houses and condos. Some developers last year stepped into the unfamiliar world of auctions to move their unsold inventory.
Auctions of foreclosed properties and excess developer inventory produced mixed results last year. At some auctions, almost nothing sold; at others, there was a buyer for almost every unit.
South Florida saw a similar wave of auctions during housing downturns in the early 1980s and early 1990s, said veteran auctioneer Martin Higgenbotham of Lakeland.
“Auctions create the bottom line, the real value in the marketplace,” he said. “If all properties were sold at auctions, there would never be a boom and there would never be a bust.”
Higgenbotham recalls March 1983 when he spent days in a tent trying to auction 225 condos at Biscayne Cove, a high-rise building overlooking Biscayne Bay in North Miami Beach. Units were sold at discounts of 30 to 45 cents on the dollar, he said last week.
“I have been through six economic downturns since 1959 and it is always the same,” he said. “This time, too, you will get 30 percent to 45 percent discount of the retail price.”
Four auctioneers said buyers priced out of the market during the housing bubble now have an opportunity to acquire homes at their true market value. But bargain hunters need to educate themselves to avoid trips to court or buying an unsuitable property, experts warn.
A common snag for new auction attendees is the buyer’s premium, a 5 percent to 10 percent fee added to the final bid by the auction house to pay for the advertising expenses, a buyer broker’s participation — ranging from 1 percent to 3 percent — and the auction company’s commission.
If a final bid is for $100,000, for example, a 10 percent buyer’s premium comes to $10,000 and the total contract price is $110,000.
 “Buyers often get caught up in the frenzy of the bidding and forget about the buyer’s premiums,” said Esslinger Wooten Maxwell agent Lucas Lechuga, who recently began working with clients interested in buying condos at auctions.
“Buyers should be aware to bid knowing they will need to pay [the additional fee.]”
Charles “Chuck” Tatelbaum, a bankruptcy lawyer with Adorno & Yoss in Fort Lauderdale, said novice bidders may end up paying more than a property is worth if they aren’t careful.
“People will pay more at an auction sale than if they sit down and negotiate with the seller,” he said. “It is the intensity of the sale. There is a certain psychological contagiousness.”
Procedures and pitfalls
To register to bid, prospective buyers are required to provide on the day of the auction a cashier’s check often payable to themselves for the amount of the buyer’s premium. That figure is included in a bidder’s packet available days before an auction. Unsuccessful bidders get their cashier’s check back; checks of successful bidders go toward the purchase.
Successful bidders must deposit 10 percent of the final sales price at the auction and close within 30 days to 45 days. The contracts are not contingent on obtaining financing. If buyers fail to get a mortgage, they lose their deposit.
“You need to pre-qualify yourself before going to an auction,” Higgenbotham said.
Every auction house has its own rules that are available to buyers well before the auction. Some auctioneers even hold workshops to educate potential buyers.
Even experienced investors can be seemingly tripped up by the complex technical procedures. For example, Platinum developer Maysville claimed investor Badrutt failed to make his cashier’s check payable to a developer’s real estate trust, as required by an auction agreement, according to the law suit.
Instead, Badrutt made it payable to the auction house, Fisher Auction, said Coral Gables attorney Robert Post, who represents Badrutt in his fight to buy the two units at Platinum. On the day of the auction, Fisher endorsed the cashier’s check over to the developer’s trust, but three days later, the developer rejected Badrutt’s contracts.
Badrutt is suing Maysville to force the developer to close the deal. Badrutt bid $352,000 for a three-bedroom unit with about 2,250 square feet and $324,500 for a two-bedroom unit with nearly 1,760 square feet for. Both bids are substantially below the original asking price.
Post claimed Maysville is backing off the contracts because the developer realized both bids were low and Maysville president Redondo was overcome by “seller’s remorse.”
Redondo said Badrutt failed to follow the auction rules and Redondo didn’t want to close the sales. Redondo hoped to auction 20 condos for between $350,000 and $550,000 on Sept. 20.
But the bids came in the low $300,000s and below. He sold five of the eight units he advertised as absolute auctions, meaning they were to be sold regardless of how much was offered. Badrutt’s bids were for two of those eight units.
Redondo rejected the bids for the remaining 12 units.
The five successful bidders at Platinum paid from $192 to $271 per square foot, well under the $347 to $512 per square foot price sought by condo owners trying to resell their units.
“It didn’t turn out to be what we expected,” Redondo said. “We were hoping to get better prices.”
Redondo says this was his first auction and probably his last. He plans to rent the unsold units until the market turns around. He’s also no longer interested in building Platinum’s second tower on a parcel permitted for 320 units. Instead, he put the 2.7-acre site on Biscayne Bay up for sale with a price of $39.9 million.
 Auctioneer Troy Fowler, president of Miami-based Realty & Auction Group, said he was surprised to hear about the Badrutt- Maysville lawsuit. He and three other seasoned auctioneers interviewed for this story said they have never heard of a lawsuit resulting from a failed auction.
“It is really hard for [a lawsuit] to happen,” Fowler said. “There is a very clear set of terms in the bidders’ packet.”
Doing the research
The challenges of buying houses and condos at auction go beyond understanding the terms of an auction. It includes researching the condominium complex and the individual unit to be bid on, said Miami real estate attorney John Sumberg, managing partner at Bilzin Sumberg Baena Price & Axelrod in Miami.
In a down market, there are many variables that need to be taken into account before raising the bidding card, experts warn. A bidder needs to research the percentage of foreclosed units in a building and the number of homeowners who are behind on their maintenance fees. A high number of foreclosures or delinquent dues can impact the bidder’s financing of the deal, Sumberg said. Lenders may require larger down payments or increase the interest rate of a loan if they perceive a building as risky, attorney Tatelbaum said.
“This is the first time in the last 40 years when you have condo associations go bust,” Tatelbaum said, referring to association unable to pay their bills because a large number of vacant or foreclosed units and delinquent monthly dues.
Learning process
New buyer Ford learned that lesson. She bid in a building in the Brickell area known for having a large number of foreclosed units and a beleaguered condo association. She consulted with her mortgage broker and discovered her interest rate would increase if she bought in that building. Still, she decided to pay the higher rate if she was able to get the unit in the risky building for a low price, but she was outbid.
Later, when she found a new building she liked on Coral Way in Miami, and called the condo association to get details about the property. She says she learned the board was considering suing the developer for construction defects and was weighing a special assessment to pay looming attorney fees.
“I dropped that unit right away,” Ford said.
On Dec. 15, she attended a third auction at the Miami Beach Convention Center, where lenders were hosting a foreclosure auction.
With a budget of $200,000, which was to cover the purchase price, the buyer’s premium and future maintenance fees, Ford was ready to bid on a one-bedroom, 735-square-foot condo at Brickell Key’s Isola Island.
She raised her bidding card for the last time to win at $185,000, an impressive deal considering the previous owner paid $385,000 for the unit in April 2006.
“I didn’t think I was going to get it at that price,” said Ford, who is buying the unit from Citibank.
When a lender forecloses on a property in Florida, it takes part in a foreclosure sale at the courthouse. If it finds no takers there, the lender buys the property and later holds public auctions like the one at the Miami Beach Convention Center, Tatelbaum said. 
Auction sales aren’t contingent on inspections, so it is important to inspect the unit before bidding on it, Tatelbaum said. Ford did and found some condos with mold on the walls and missing appliances, she said.
Auctioneers are targeting first-time buyers and future residents as their primary clients, Miami auctioneer Jim Gall said.
“Our goal is to find end-users, because they are the people that pay the most,” he said. Investors tend to bid low to increase their rate of return.
In 2007, he spent months preparing the auction of empty condos in North Miami and Normandy Isle. In July, more than 100 people attended the auction of 13 units at The 770 Condominium, at 770 NE 128 St. The auction was absolute, with condos selling to the highest bidders regardless of price. At reserve auctions, sellers reserve the right to reject low-priced bids.
In November, he auctioned six units at Avanti in Normandy Isle. Five sold.
In both auctions, bids came at about 25 percent to 35 percent off the original asking price, Gall said. He predicts business will pick up in the second quarter of 2008.
He’s not alone. Some of the developers who completed their projects in 2007 and closed the pre-sale contracts will most likely put their remaining unsold condos on the auction block, said Craig King, president of J.P. King, an Alabama-based auction firm.
“Developers are looking for alternatives to sell out their projects,” said King, who has a full-time employee in Miami and is recruiting people to handle auctions in Broward County. “Every week I am meeting with developers. They are beginning to get realistic. Developers are paying hundreds of thousands of dollars to carry their investments while trying to sell the condos — and that is eating into their profit.”
Developers are warming to the idea of selling fast and at a discount rather than continuing to pay carrying costs, said King, who plans to announce the auction of units at a newly built project in Broward County this week.
Not all potential sellers benefit from quick auction sales. For example, homeowners who owe more than their properties are worth wouldn’t be candidates.
Sellers need to have room to lower sale prices to let the market set a market value. But in today’s housing conditions, deflation is eroding property values, leaving homeowners owing the bank more than their home are worth, Miami auctioneer Fowler said.
“For a property to be a good candidate, it needs to have some equity because if the auction doesn’t cover the debt, you have another dilemma on hand.”
Paola Iuspa-Abbott can be reached at piuspa@alm.com or at (305) 347-6657.
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