The Truth About Real Estate Auctions

Real estate auctions can make a good news story, and even a fairy tale on occa­sion. You can't always believe newspaper stories, though. And fairy tales, as everyone knows, are little morality plays that aren't literally true.

Consider two recent auctions in Anchorage. FDIC auctioned off the last of its portfolio of residential and commercial real estate on August 7. New York Life Insurance Co. had an auction of two commercial buildings September 27.

The FDIC auction at the Sheraton packed the Howard Rock Ballroom. "Bid assis­tants" roved the room screaming "Yes!" to the auctioneer when they located a bidder. At the beginning there was lots of applause each time the gavel fell. Later, people caught on, noticing that the applause was just promoted by the bid assistants, who were quickly left as the only ones clapping.

New York Life used a smaller room at the Sheraton. There were about two dozen middle-aged white guys in suits—investor types and real estate agents. Just before the bidding started, an Asian couple with two toddlers took seats in the front row. When the kids got itchy during the bidding he took them to the back of the room while she kept bidding. A minute to two later she was the only one with a card in the air, at $1,250,000. A bid assistant was whispering in the ears of the only other bidders. They didn't look like they were listening.

What you might have seen at the auctions wasn't in every case what ended up hap­pening. At the FDIC auction bidders who were marched off to sign contracts and make large non-refundable deposits sometimes backed out. Backup bidders got the properties, at their prices.

At the New York Life auction, everyone who showed up got a bid card with a big number on it, which they were told to stick in their jacket pockets. You didn't have to be a bidder with a $50,000 cashier's check to get one. There were reportedly only about a half dozen of those people.

The apparent sales prices of the Alaska Legal Center at 1016 W 6th ($1.4 million plus a two percent "bidder's premium") and the Carlton Trust Building at Northern Lights and Lake Otis, were about half the tax assessed values. For the Legal Center I verified the income and expense data and calculated a cap rate, the ratio between net operating income and sales price, at 23 percent. Half that is more what a seller might hope for. Maybe the real estate agent and his investor partner who bought it didn't get the building at half price, but one has to ask why no one else was there to bid at least a little more.

The Asian couple who were written up in the Daily News as successful bidders for the Carlton Trust Building sounded like an American fairy tale. He's a cook; she's a postal worker. As quick as they started bidding, the timid white guys in suits dropped out. "Real estate is a good investment" said the winning bidders, "It's better than having money in the bank." The next day I was telling people "the future is them."

Something happened between these reports and the deadline for this column. The Asian couple didn't wind up with the property, guys who own an office building in mid­town reportedly did. The auctioneers didn't call back to confirm this, or whether the high bid on the Legal Center was actually accepted: New York Life had a few days to decide whether the price was right for them.

Both transactions will probably be completed and closed in the next two weeks, regardless. Real estate isn't much of the giant New York Life portfolio. Million dollar properties in Anchorage, while a big deal by local standards, are just garage sale items to them.

Do the auction prices reflect fair market value? Another local real estate columnist argues that a well-advertised auction by its nature demonstrates where the market is. This may be true for smaller properties where many bidders can fairly consider the opportunity. It may not be as valid for larger properties where information is hard to obtain enough in advance to fairly formulate a bid.

For a seller, auctions bring closure. FDIC wanted to close its Alaska office this month. New York Life may have been under pressure to reduce its real estate holdings nationwide by the end of the year because of new accounting rules that otherwise would require larger reserves for potential losses.

For buyers, auctions force them to decide. The event is going to happen regardless and if you aren't there you don't play. But people who are pushed, push back. They cau­tion themselves against "auction fever."

Real estate is a big investment for most people. They are cautious regardless of the marketing method. Although I have heard scattered reports of bids slightly above market on condos and smaller properties at FDIC auctions, the prices of larger properties sold at auction strike me as low. The seller who gets under pressure to auction a property to meet a deadline can pay a stiff penalty for choosing this marketing technique.