COVER STORY, APRIL 2007

THE AUCTION ADVANTAGE
How to sell properties that are difficult to value.
Steven L. Good and Steven O. French

Good

Selling unique, difficult-to-value commercial real estate can prove a daunting challenge to any owner. Alaskan fishing resorts, historic hotels, mobile home parks, obsolete industrial and manufacturing buildings that are ripe for redevelopment, and even major apartment complexes in second- and third-tier cities can be properties that make determining value a problem for buyers and sellers alike.

A trend that has gained a strong foothold in the real estate industry is the use of real estate auctions to serve as a market maker in these circumstances. It identifies able buyers, creates a defined timeline for the sale and closing, and, most importantly, serves to produce true market prices through the competitive bidding process. Auctions for real estate are now viewed as an intelligent choice for finding — or creating — a market for a specific property and maximizing the sales pricing.

French

One example of this methodology and the results that can be accomplished comes from two sales of the world-renowned Redstone Castle near Aspen, Colorado. The spectacular 27,000-square-foot castle, which was filled with 80 percent of its original furnishings, was built in the late 1890s as a hunting cabin by John Osgood, the legendary “Fuel King of the West.” Since the 1970s, it had supported various commercial enterprises: dude ranch headquarters, boutique hotel, wedding and events center, wellness compound, etc. There certainly was no other property of its kind and no true way to value it along with its contents.

To find a buyer for the property, which had been for sale for years using the traditional brokerage approach, a national marketing campaign was designed and conducted, and, because of the notoriety of the castle, word spread to an international audience of qualified buyers. Prior to the auction date, a buyer surfaced and offered to purchase the castle for $5 million, which was $2 million more than the highest offering price ever received by the seller. The seller accepted the pre-auction offer, the auction was canceled and the sale closed.

The 27,000-square-foot Redstone Castle near Aspen, Colorado

The buyer intended to develop the 150 acres surrounding the castle and fronting the Crystal River into exclusive homesites and use the castle as an amenity for the homeowner’s association. Six months following the purchase, the new owners became frustrated with the cumbersome approval process and decided to sell the castle again at auction. That second auction produced a buyer for the property that had been closed to the public for 6 months with no operating income and an uncertain future. The sale price at the second auction was $6.3 million.

At times, a property owner has a perception that his property has one use and the value should be based on that use. With an auction program, however, buyers have the ability to determine the highest and best use from their own perspectives, and, because of competitive bidding, they will pay accordingly.

A good example is the Eagle Point community in Marysville, Washington, north of Seattle. Developed in 1971, the modest, 39.5-acre community of 230 home sites was a good revenue producer for a community of its size, generating a net operating income (NOI) of $890,000. In very spirited bidding at the auction, the property sold for $11.5 million or $50,000 per home site. The day after closing, the new owner sent notice to all tenants that the community was closing and condominiums were to be built on the site.

The trend in selling real estate at auction has taken hold and is growing rapidly for a variety of reasons, including the property may be difficult to value, buyers may see a higher and better use than they would if the property were marketed to a limited audience for a specific use, timing of the sale may be critical to the seller, an entire portfolio can be sold in a one-day event even though the properties are located in vastly different geographic areas, and auctions create an arena in which a true arm’s-length transaction is consummated, with no contingencies in the purchase contracts.

Sellers and buyers alike view the auction process as an efficient, fair and expeditious manner in which to conduct real estate transactions. Expect to see more auctions in the near future.

Steven L. Good, based in Chicago, is chairman and Steven French, based in Denver, is vice president of Sheldon Good & Company.


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